The conflict between crypto and the government doesn’t cease as the European Parliament voted to ban all anonymity in the cryptocurrency sector by implementing strict identity checks in self-hosted crypto wallets.
The majority of support votes came from the Progressive Alliance of Socialists and Democrats (S&D), the Left in the European Parliament (GUE/NGL), the Green Party, and the Renew Party. The opposition came from the Centre-Right group consisting of the European People’s Party (EPP) and the Identity and Democracy Party (ID). This prevents payment systems from being a new venue for money laundering concentrated in the cryptocurrency sector.
As the draft does not specify any lower limit for crypto transfers, it will be applicable for every transaction. That will force crypto firms to collect and reveal the identity of the parties involved in a transaction. This attack on self-hosted wallets attracted widespread criticism within the industry since the issue came to the forefront last week.
This draft will enter trialogue negotiations with representatives of the European Parliament (EP), the European Commission, and the Council of the EU, which is a process that could take months.
But according to some members, it is still possible to introduce changes to the draft before it is passed, giving some hope of repealing the amendments.
Cryptos are stored in crypto wallets of different types, hardware wallets, hosted wallets, and non-custodial/self-hosted wallets. A hardware wallet is where a person’s crypto assets are stored offline in a physical device the size of a thumb drive. It is not the popular form of wallet because of its complexity and cost but offers protection from hackers.
The second is the hosted wallet which is the most used wallet system. A person can buy cryptocurrencies using a third-party app, which will then store the assets for them, similar to a bank. Its simple nature attracts even the uninitiated.
The third (and the party of the scandal) is non-custodial wallets or self-hosted wallets. In this, there is no third-party or any hardware. While exchange apps and websites provide software support, remembering and safeguarding the password falls entirely on the owner. It gives the owner full control over their crypto assets, but they can also access more advanced crypto activities that are not so possible in other wallets.
Since the advent of cryptocurrency, many regulators pointed out the chances of these platforms becoming hosting places for money launderers and other illegal activities. Since then, the regulators have tried to extend the scope of anti-money laundering (AML), and counter-terrorist financing (CFT) rules into the crypto sphere.
One of the needed requirements in these regulations is the close surveillance and monitoring of users and transactions. The users of cryptocurrency say that such regulations counter the aims of cryptocurrency itself, a currency under personal privacy beyond the regulations of a governing authority.
Even as the draft was discussed, many anti-regulators have protested against it, saying that it is an encroachment on individual freedom promised in the cryptocurrency world.
When more than 90 members voted supporting the draft, it placed the self-hosted wallets under the requirements of AML. December onwards, they discussed removing the EUR 1,000 threshold for the application of AML and against the self-host wallet users. The draft was put to the vote by avoiding the warnings of the industrial experts, who warned of technological lag and legal challenges if regulations increased over the crypto sector.
When passed, platforms like Coinbase should report to the authorities whenever a customer receives over EUR 1,000 of crypto from a self-hosted wallet. If the transaction limit is not placed, every transaction has to be reported. Since the vote, the price of Bitcoin dropped 2% in minutes, falling from $47,500 to $46,400.