EU Parliament Votes In Favour Of KYC For Private Crypto Wallets

European Union lawmakers have voted in favour of controversial proposals that require exchanges to collect personal data from individuals who transact more than EUR 1,000 using unhosted wallets.

BREAKING: The ECON & LIBE committees of the EU Parliament voted in favor of the FTR compromises D & E that crack down on “unhosted” wallets.
Entire regulation draft to be voted on later today, but will certainly go through.
Breakdown of the vote & more updates in this thread.
— Patrick Hansen (@paddi_hansen) March 31, 2022

Bad News for Exchanges

The proposals were passed, albeit narrowly, and purport to effectively prohibit anonymous crypto transactions:

2/ Very thin margins.
Compromise D: 58 yes | 52 no | 7 abstentions
Compromise E: 62|51|5
It seems like a majority of (most) MEPs from S&D, GUE, Greens & Renew voted in favor, while a minority of (most) MEPs from EPP & ID voted against. ECR seems more split (tbd).
— Patrick Hansen (@paddi_hansen) March 31, 2022

The underlying justification behind the proposals is that they intend to extend anti-money laundering (AML) requirements that apply to conventional payments over EUR 1,000 to the crypto sector. As Coinbase CEO Brian Armstrong noted, however, the burden imposed on exchanges would be extremely onerous:

4/ This means before you can send or receive crypto from a self-hosted wallet, Coinbase will be required to collect, store, and verify information on the other party, which is a not our customer, before the transfer is allowed.
— Brian Armstrong – barmstrong.eth (@brian_armstrong) March 30, 2022

5/ Moreover, any time you receive 1,000 euros or more in crypto from a self-hosted wallet, Coinbase will be required to report you to the authorities. This applies even if there is no indication of suspicious activity.
— Brian Armstrong – barmstrong.eth (@brian_armstrong) March 30, 2022

Most of the pushback from industry is because non-custodial wallets aren’t necessarily customers, with commentators describing the measures as “anti-innovation and anti-privacy”.

Referring to Chainalysis data showing that less than 0.05 percent of crypto volume was related to crime, hardware wallet provider Ledger argued that the proposals were neither necessary nor proportionate. It further noted that they reduced financial freedom, consumer protection and financial inclusion, and put Europe at a competitive disadvantage relative to other jurisdictions.

Proposals’ unintended consequences. Source: Ledger

While some noted that users would simply resort to decentralised exchanges or send EUR 999 at a time, others had a more humorous perspective:

EU, please also ban “unhosted cars”.
Cars have trunks! One might even smuggle meat or nasty #Bitcoin mining hardware! 👀
Only “hosted cars” should be legal from now on! https://t.co/vzsjbRk199
— MrLuee 🧡⚡ (@MrLuee) March 30, 2022

Turning Up the Regulatory Heat

This year has already shown that European lawmakers are increasingly scrutinising the digital asset sector. A few weeks ago, the EU Parliament finally decided not to ban proof-of-work cryptocurrencies (effectively Bitcoin), after going back and forth on the matter.

The next battle is clearly over unhosted wallets and for now it appears as if the regulators are in the driving seat. Importantly, the laws have not been enacted and still need to go through tripartite meetings between the EU Parliament, European Commission, and European Council.

Despite expectations that little will derail the proposals in question, if there is one thing we know about the crypto sector it’s that it will never go down without a fight.