Sebastian Sinclair

<div id="highlights-block_62bcf03a02ea2" class="highlights">
 <ul>
 <li>EU policymakers have reached a deal on a new bill that seeks to clamp down on crypto money laundering activity</li>
 <li>Transactions between unhosted wallets, those not controlled by exchanges, remain unaffected</li>
 </ul>
 
</div>



EU policymakers reached a deal Wednesday on a new bill that seeks to track crypto transfers, with no minimum threshold requirements or exemptions for low-value transfers, on exchanges and similar platforms.



The ruling, aimed at crypto asset service providers (CASPs) under the Financial Action Task Force&#8217;s &#8220;Travel Rule,&#8221; will require information relating to each transaction to be stored on both sides of the transfer. 



Dubbed the Transfer of Funds Regulation, the bill seeks to apply wire transfer obligations to crypto transfers by requiring CASPs to collect and send customer data with transactions.



CASPs will also be required to provide information to relevant authorities if an investigation is conducted into money laundering and terrorist financing, according to a statement on Wednesday. CASPs include the likes of custodians, exchanges and regulated trading platforms.



Transactions from wallets that are not based on exchanges — what regulators call &#8220;unhosted&#8221; — will also be covered under the new rule when an individual interacts with wallets managed by CASPs. Peer-to-peer transfers between individual wallets will not be covered under the legislation.



EU lawmaker Ondrej Kovarik said in a <a href="https://twitter.com/OKovarikMEP/status/1542216232098844674?s=20&amp;t=gVaTnnDftUW1Hj7mFpjIzA" target="_blank" rel="noreferrer noopener">tweet</a> on Wednesday the agreement on the regulation, &#8220;strikes the right balance in mitigating risks for fighting money laundering in the crypto sector.&#8221; The lawmaker also said it would not hinder or overburden innovation and businesses.



The legislation is part of the union&#8217;s anti-money laundering package and will be aligned with the <a href="https://cms.blockworks.co/eu-negotiators-want-to-hammer-out-crypto-bill-this-month/" target="_blank" rel="noreferrer noopener">Markets in Crypto-assets rules</a> (MiCA), the policymakers said.



It&#8217;s the latest development following MiCA, first introduced to parliament in 2020, which sets out common rules for crypto regulation across all 27 EU member states. The latest bill complements existing measures currently being pursued within the bloc including clamping down on what it perceives as shady crypto activity.



“This new regulation strengthens the European framework to fight money-laundering, reduces the risks of fraud and makes crypto-asset transactions more secure,&#8221; said Ernest Urtasun co-rapporteur of the bill. &#8220;This regulation introduces one of the most ambitious travel rules for transfers of crypto assets in the world. We hope other jurisdictions will follow the ambitious and rigorous approach the co-legislators agreed today.&#8221;



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

Crypto

EU To Require Exchanges To Identify Most Crypto Transactions

Ben Strack

<div id="highlights-block_6245ad3087822" class="highlights">
 <ul>
 <li>The proposal called for crypto firms to reveal info about the sender and receiver of crypto transfers</li>
 <li>Coinbase executive said the measures would unleash a surveillance regime on exchanges, stifle innovation and undermine self-hosted wallets</li>
 </ul>
 
</div>



Two European Parliament committees have voted in favor of measures requiring crypto companies to collect and share data on certain transactions.



The Committee on Economic and Monetary Affairs and the Committee on Civil Liberties, Justice and Home Affairs <a href="https://www.europarl.europa.eu/cmsdata/246608/ECON-LIBE%20Voting%20Session%20-%2031%20March%20(amendments)%20RESULTS.pdf" target="_blank" rel="noreferrer noopener">voted</a> to expand anti-money laundering requirements in the crypto space.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">BREAKING: The ECON &amp; LIBE committees of the EU Parliament voted in favor of the FTR compromises D &amp; 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 &amp; more updates in this thread.&mdash; Patrick Hansen (@paddi_hansen) <a href="https://twitter.com/paddi_hansen/status/1509536318585454597?ref_src=twsrc%5Etfw">March 31, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Spokespeople for the committees did not immediately return a request for comment.



European Union ambassadors <a href="https://www.consilium.europa.eu/en/press/press-releases/2021/12/01/anti-money-laundering-council-agrees-its-negotiating-mandate-on-transparency-of-crypto-asset-transfers/" target="_blank" rel="noreferrer noopener">agreed on a mandate</a> in December to negotiate with the European Parliament on a proposal to extend the scope of fund transfer rules to include certain cryptoassets.&nbsp;



The proposal aimed to require crypto service providers, such as exchanges, to collect and share information about the sender and beneficiary of these asset transfers — a practice that payment service providers currently do for wire transfers.



Legislators hoped to ensure traceability of transfers between crypto service providers and so-called “unhosted wallets” so as to be able to better identify possible suspicious transactions and potentially block them.



An unhosted wallet is a term used by the <a href="https://www.fatf-gafi.org/" target="_blank" rel="noreferrer noopener">Financial Action Task Force</a> and <a href="https://www.fincen.gov/" target="_blank" rel="noreferrer noopener">Financial Crimes Enforcement Network</a> and adopted by other government and regulatory bodies. It means that an individual maintains their own private keys — known in the crypto industry as a “wallet” or “self-hosted wallet” to delineate between assets controlled by a financial institution acting as a custodian and an individual.



Requirements to check if the information on the payer or payee is accurate is to be imposed on crypto transfers that exceed 1,000 euros, according to <a href="https://www.europarl.europa.eu/doceo/document/CJ12-PR-704888_EN.pdf" target="_blank" rel="noreferrer noopener">a draft report</a>.



Slovenian Finance Minister Andrej Šircelj said in December that the proposal was an important step toward “closing the gaps in our financial systems that are malevolently used by criminals to launder unlawful gains or finance terrorist activities.”



Markus Ferber, who has served in the European Parliament since 1994 and is a member of the European People’s Party (EPP), took to Twitter Thursday to share his opposition to the proposal.



“We need to take AML risks in crypto seriously, but should not ban unhosted wallets,” Ferber tweeted. “This would be the equivalent of banning cash — unnecessary and disproportionate!”



Fellow European Parliament member Paul Tang responded to Ferber’s tweet, noting that passing the proposal would not ban anything.&nbsp;



“Instead we oblige verification to prevent crime and corruption through unhosted wallets,” Tang wrote. “Crime and corruption aren&#8217;t innovation, I&#8217;m sure a law-and-order party like the German EPP would agree?”



Paul Grewal, chief legal officer at crypto exchange Coinbase, wrote in <a href="https://blog.coinbase.com/making-your-voice-heard-ahead-of-thursdays-critical-eu-vote-f03730e83e5c" target="_blank" rel="noreferrer noopener">a March 27 blog</a> that “bad facts make bad law,” noting the EU’s upcoming vote.



“If adopted,” he wrote, “this revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets.”



Patrick Hansen, head of strategy and business development at Unstoppable Finance, said in a Twitter post that formal meetings about these measures, known as “trilogue,” could take a couple of months.&nbsp;



“We have lost a battle, but this is far from over,” he said.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

EU Parliament Committees Vote To Crack Down on Crypto Transfers

<div id="highlights-block_62410b3ae23ed" class="highlights">
 <ul>
 <li>Several amendments within the EU&#8217;s Transfer of Funds Regulation are taking aim at the way crypto transactions from so called &#8220;unhosted wallets&#8221; are handled</li>
 <li>Policymakers are also proposing that for every crypto transfer from an unhosted wallet over 1,000 euro are reported to relevent authorities</li>
 </ul>
 
</div>



The European Parliament is expected to vote on revised anti-money laundering (AML) legislation this week that would force crypto exchanges to share details of their customer&#8217;s anonymous transactions.



In a <a href="https://www.europarl.europa.eu/doceo/document/CJ12-PR-704888_EN.pdf" target="_blank" rel="noreferrer noopener">draft report</a> of the EU&#8217;s Transfer of Funds Regulation (TFR), policymakers are seeking new amendments that regulate the way unhosted digital wallets are treated within the bloc. 



Unhosted wallets, such as Metamask, refer to digital wallets not under the purview of the Financial Action Task Force (FATF) and its definition of a licensed virtual asset service provider (VASP).



Another provision within the document also seeks an obligation of financial institutions to accompany transfers of funds with information of the payer and recipient, even when the recipient isn&#8217;t a customer of a particular VASP.



Under Amendment 124 Section 29(a) the document states:



<blockquote class="wp-block-quote is-style-default is-layout-flow wp-block-quote-is-layout-flow">&#8220;In cases of a transfer of crypto-assets made from a distributed ledger address not linked to a crypto-asset service provider, known as an &#8216;unhosted wallet,&#8217; the crypto-asset service provider of the beneficiary should have to obtain information from the beneficiary both on the originator and the beneficiary,&#8221; the draft reads.</blockquote>



The amendments, which have already been criticized by several major industry figures, are expected to be voted on by no later than Thursday. According to major crypto exchange Coinbase&#8217;s Chief Legal Officer <a href="https://blog.coinbase.com/making-your-voice-heard-ahead-of-thursdays-critical-eu-vote-f03730e83e5c">Paul Grewal</a>, the changes are based on &#8220;bad facts&#8221; in the way regulators view crypto as a vehicle for criminal activity.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;Among the worst of the proposed provisions are new obligations on exchanges to collect, verify and report information on&nbsp;non-customers&nbsp;using self-hosted wallets,&#8221; said Grewal. &#8220;For instance, one provision requires exchanges to not only collect personal data about wallet users who are&nbsp;not&nbsp;their customers, but to also verify the data’s accuracy before allowing a transfer to one of their customers.&#8221;</blockquote>



&#8220;If adopted, this revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets,&#8221; Grewal said.



Ironically, Grewal&#8217;s comments come amid the exchange&#8217;s <a href="https://help.coinbase.com/en/coinbase/trading-and-funding/sending-or-receiving-cryptocurrency/how-to-send-crypto" target="_blank" rel="noreferrer noopener">announcement Friday</a> that will require its customers in Singapore, Japan and Canada, who are sending crypto to another exchange, to provide information about their transfers including recipients&#8217; names and addresses.



In July of last year, the European Commission adopted the FATF&#8217;s AML and counter financing of terrorism legislative package in a bid to make it possible to trace crypto transfers.



EU policymakers are claiming the measures are designed to &#8220;ensure crypto-assets from potentially dodgy sources do not enter the regulated financial system.&#8221;



To pass legislation within the EU, the Parliament, representing European citizens, and the Council, representing the governments of the 27 EU member states,&nbsp;must reach an agreement on an&nbsp;<a href="https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/690614/EPRS_BRI(2021)690614_EN.pdf" target="_blank" rel="noreferrer noopener">identical text</a>&nbsp;of a given bill.



According to a <a href="https://twitter.com/paddi_hansen/status/1507741879563132928?s=20&amp;t=XBnbQKH77EVvuKqVWjCroA" target="_blank" rel="noreferrer noopener">tweet thread</a> by Patrick Hansen, DeFi wallet Unstoppable Finance’s head of growth, the EU&#8217;s proposed measures would seek to limit or otherwise force a soft ban on unhosted wallet usage.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;For every crypto-transfer from an unhosted wallet over 1k EUR, companies are obliged to inform the “competent AML authorities”. For ALL these transactions, even if there is no sign/suspicion of money laundering. This is an absolute violation of privacy rights,” said Hansen.</blockquote>



&#8220;The consequence of this&#8230;is that most crypto companies won’t be able or willing to transact with unhosted wallets anymore in order to stay compliant,&#8221; he said.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

Transfer of Funds Regulation

Newsletter

Blockworks Research