Barely a week after a possible ban on Proof-of-Work (PoW) digital assets was dropped from the European Union’s prospective MiCA infrastructure, which is a new threat to the crypto space may be emerging in the European Union. This time around, it is non-custodial, or unhosted, wallets that are in the regulators’ crosshairs.
This proposed legislation may need exchanges to authenticate personal data behind any transaction. On March 31, the European Parliament Committee on Economic and Monetary Affairs is set to vote on an anti-money laundering (AML) regulatory package that aims to revise the current Transfer of Funds Regulation (TFR) in a manner that extends the need for financial institutions to attach important information on the transacting parties to cryptocurrency assets.
The rapporteurs of the rules and regulation are Ernest Urtasun from the Greens and Assita Kano from the Conservatives and Reformists group. As cryptocurrency proponent Patrick Hansen from blockchain company Unstoppable DeFi warned, the latest draft of the law would need crypto service providers not just to collect personal data that is related to the transfers made to and from the unhosted wallets as they are already compelled to do, but:
“Verify the accuracy of information with respect to the originator or beneficiary behind the unhosted wallet.”
The real issue with the language is that in most cases it can be challenging, if not now impossible, for the crypto service providers to authenticate an “unhosted” counterpart. Therefore, to remain compliant and safeguard their place in the European Union market, these firms would be compelled to cut off transactions with unhosted wallets, Hansen fears.
Although lawmakers put some guidelines for verification processes and regulations in place, the possible operational costs of compliance might scare off the smaller players and lead to a lot of market concentration.
This draft also features the obligation to inform the “competent AML authorities” of any transfer worth 1,000 EUR or more to/from an unhosted wallet. Furthermore, within a year after the bill’s enactment, the European Union Commission would be needed to assess whether any “additional specific measures to mitigate the risks” from such transactions are required.
It is not quite clear what extra measures might be implied, but, as Hansen warned, this might mean anything up to the outright ban on non-custodial wallets.
