Cryptocurrencies: the EU anti-money laundering regulation gives the sector cold sweats

Posted Apr 1, 2022, 5:08 PMUpdated on Apr 1, 2022, 5:14 PM

Will the European Union put a stop to the development of cryptos? This is the threat brandished by the players in the sector. The reason ? The European Parliament on Thursday approved a draft regulation on the use of cryptocurrencies within the EU. The text plans to bring cryptocurrencies within the scope of European anti-money laundering laws.

Two provisions in the regulation are of particular concern to cryptocurrency professionals. The first is the obligation for digital asset service providers (PSAN) established in the Union to collect and verify the personal information of the recipient and beneficiary of all crypto transfers that pass through their platform, whatever the amount.

The cryptosphere denounces a “double standard”

In the cryptosphere, we denounce unequal treatment. “Within the EU, only bank transfers of more than 1000 euros are monitored,” explains Elias Bourran, an expert lawyer in blockchain and crypto-asset law. “Here, the Commission wants to get rid of this limit for cryptocurrencies and impose on PSANs to collect information for all amounts. This amounts to imposing more obligations on PSANs than on traditional banks, ”he explains.

Some MEPs justify this measure in the name of the fight against “smurfing”. A practice which consists of splitting a large transfer into several small sums to pass under the radar of regulators. The very high volatility of cryptocurrencies would also render any reporting threshold obsolete, it is explained on the Brussels side.

Non-hosted wallets, a “gaping hole” in regulation

The second measure that worries blockchain players concerns non-hosted wallets. This type of wallet allows the user to keep his private key himself, without an intermediary. Many individuals prefer to store their tokens on these non-hosted wallets for fear that their assets will be stolen by hackers, seized by exchanges or blocked in the event of a sudden change in legislation.

According to the European legislator, these non-hosted wallets are “a gaping hole in the regulations”. Because unlike wallets hosted on platforms like Coinhouse, it is not necessary to provide proof of identity to open and use a non-hosted wallet.

And this is what bothers the European legislator, who wants each PSAN to collect and verify information on the identity of the originator and the beneficiary of all crypto transfers involving non-hosted wallets transiting through its platform.

“Non-hosted wallets need to be identified, in the same way that you must identify yourself when you deposit money in a bank account”, argued on Twitter the Dutch MEP Paul Tang (Socialist Alliance and Democrat).

Privacy in question

This prospect has sparked an outcry from many players in the crypto world. “Europe wants to blacklist wallets that are not hosted. If you have a personal wallet, Coinhouse will have to refuse transactions from or to your non-hosted wallet,” explains Sandrine Lebeau, Coinhouse’s compliance director. “It would be tantamount to prohibiting people from having their own cryptocurrency independent of platforms. »

However, the exchange of cryptocurrencies without going through a centralized financial institution is “the very essence of cryptocurrencies”, explains Rija Rameolarison, director of compliance at Deskoin. The prospect of having to attach non-hosted wallets to an identity is unthinkable for him. “A personal wallet has the same value as a safe or a wallet in your pocket. Would you allow someone to know what’s in your safe, or in your wallet? asks this blockchain expert who also defends the right to privacy.

The French unicorn Ledger, which markets hardware electronic wallets, has meanwhile denounced regulations that pave the way for a “financial supervision regime” that will “limit innovation” and “diminish Europe’s ability to exploit the potential of blockchain”.

The context of the war in Ukraine

The Economic and Monetary Affairs Committee of the European Parliament justifies this tightening of the legislation in the name of the fight against “the risks posed by the misuse of crypto-assets for the purposes of money laundering or financing of terrorism”. “The idea is to protect yourself against the dangers that cryptocurrencies can represent,” says a source in Brussels.

For professionals in the sector, the Commission shows an exaggerated distrust of cryptocurrencies. “There is no tangible information that corroborates the conclusions of the European Union on the continual growth of the risks of money laundering”, affirms the lawyer Elias Bourran.

In its latest report, the specialized firm Chainalysis indicates that crypto transactions increased by 567% between 2021 and 2020, while illegal transactions increased “only” by 79% over the same period. “Due to the increase in the legal use of cryptocurrencies, the proportion of illegal transactions among all transactions has never been lower,” the report writes. In 2021, illegal transactions accounted for 0.15% of total transactions according to the report, compared to 3.37% in 2019.

The other argument of MEPs is the possible circumvention of sanctions by the Russian oligarchs. “Crypto-assets concern me the most in the Russian context,” warned Christine Lagarde, President of the European Central Bank, last week. According to her, cryptocurrencies are “certainly being used as a means of trying to circumvent the sanctions that have been decided by many countries around the world against Russia and specific actors”.

“For us, it is very important that cryptocurrencies are regulated. Since Deskoin is registered as PSAN, our market has expanded, because we inspire more confidence among investors. But there, there is haste on the part of the European Union”, denounces Rija Rameloarison. “There is a concern for proportionality between the risk of cryptocurrencies and the response that we bring to this risk”, abounds Elias Bourran.

Lethal regulations for the sector?

More broadly, players in the crypto-sphere fear that the EU regulation will put a brake on the emergence of a solid European sector. “In Europe, the sector will be weakened. For very few results,” warns Sandrine Lebeau at Coinhouse. “This will make the European market much less competitive,” argues lawyer Elias Bourran.

“We must not let ourselves be carried away by the language elements of the sector, which does not really want to be regulated. The challenge is to adapt the regulations to cryptocurrencies. It’s a new market, it needs to be regulated,” argues MEP (Socialists and Democrats) Aurore Lalucq. “For the reputation of the crypto market, it is important,” she adds. “We must establish limits and put an end to the European Wild West”, supports MEP (Renew Europe) Stéphanie Yon-Courtin.

The subject is sensitive: Aurore Lalucq claims to have been the target on Twitter of raids aimed at intimidating her. Before entering into force in the Union, the text must still be examined in trilogue between the Council of the European Union, the Parliament and the Commission.

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