European crypto firms may soon be forced to implement KYC (Know Your Client) procedures for non-custodial wallets they do business with.
On March 31, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) approved provisions of the European Funds Transfer Regulation that prevent Virtual Asset Service Providers (VASPs) from conducting transactions with non-hosted wallets without first verifying the identity of their owners.
In addition, VASPs must report all crypto transactions worth more than EUR 1,000 to the relevant money laundering authorities.
The move follows the inclusion of tough provisions targeting the crypto sector in the U.S. Infrastructure Act last November. If enforced to the max, these regulations could oblige network validators and software developers to collect KYC information about their transaction counterparties – which in many cases is impossible.
markets pause
As stormy regulatory clouds gather over both the United States and Europe, the recent crypto rally appears to have stalled. According to CoinGecko, every non-stablecoin crypto asset that ranks in the top 30 by market cap is down over the past 24 hours, while only four of the top 100 have posted a daily gain.
In its final vote, the draft law was adopted with a clear majority. Patrick Hansen of Unstoppable Finance tweeted that 93 MEPs voted in favor versus 14 against, with 14 abstentions.
The regulations will next be discussed in a trilogue with the European Commission and European Council in mid-April, where the provisions may face more opposition. “The trilogue usually lasts a couple of months and is the last chance to introduce changes,” Hansen said.
“Individual voices from the Council and Commission make me optimistic that we can still achieve changes… As a reminder, this is not the final stage of the legislative process,” he added.
If the legislation goes through the trilogue, crypto companies still have nine months to adopt plans to adopt and implement the regulation, and 18 months until they need to ensure full compliance.
Coinbase Co-Founder and CEO, Brian Armstrong, described The legislation treats “any person who owns crypto differently than fiat.”
“This means before you can send or receive crypto from a self-hosted wallet, Coinbase must collect, store and verify information about the other party that is not our customer before allowing the transfer,” he said. Armstrong went on to say that Coinbase will be required to report its customers to authorities “at all times.” [they] Received $1,000 or more in crypto from a self-hosted wallet.”
“Imagine if the EU required your bank to report you to the authorities every time you paid your rent just because the transaction was over 1,000 euros.”
Brian Armstrong, CEO of Coinbase
Unstoppable finances Posted that transactions between non-custodial wallets and centralized exchanges would “become much more costly and burdensome” due to data collection requirements.
The team speculated that “smaller crypto companies with fewer resources” could ban transfers to self-hosted wallets to avoid the costs, hamper their competitiveness and drive European users to foreign platforms.
Unstoppable too warned that the databases storing names, home addresses, and other sensitive personal information would become the target of hackers and criminals, which could lead to increased incidents of hacking, phishing, and physical violence against crypto users.
Future Impact
In a March 27 thread, Hansen also identified several future threats that could arise should the regulations go into effect.
He noted that a year after the legislation comes into force, the European Commission may “assess additional specific measures to mitigate the risks posed by transfers to or from non-hosted wallets, including possible restrictions.” This means the commission could potentially move towards imposing a total ban on transfers between VASPs and non-custodial wallets in the future.
Hansen added that after three years, the commission will present a detailed report on the application and enforcement of the legislation, including an assessment of whether a “specific obligation for hardware… and software wallet providers” is needed. Such a determination suggests that the Commission could directly target Ledger, Trezor, and MetaMask at a later date.
MEP Paul Tang defended himself against the many critics of the bill. tweet that the vote “will not ban anything”.
“Instead, we are committed to verification to prevent crime and corruption from non-hosted wallets,” he continued. “Crime and corruption are not innovations.”