In fact, there are reasons to celebrate. The Bitcoin ban was not tabled again by the EU Parliament this week. A proof-of-work ban as part of the so-called MiCA regulation is practically off the table, we report. Now looms the next wave of possible bans or at least massive restrictions on DeFi apps and wallets not hosted in the European Union.
The same committee that negotiated the MiCa regulation is now debating identity disclosure requirements for crypto transactions. The ECON Committee of the EU Parliament deals specifically with the Transfer of Funds Regulation, or TRF for short. This is based on the FATF International Travel Rule, which defines the standards to combat money laundering.
Red alert for DeFi in the EU
Already next Thursday, March 31, there will be more votes on the anti-money laundering regulation related to cryptocurrencies in the ECON committee. The fact that the so-called TRF establishes stricter disclosure requirements for crypto transactions is not new. However, BTC-ECHO has now leaked documents that provide for particularly harsh measures. Crypto experts like DeFi expert Patrick Hansen of Unstoppable Finance are alarmed:
Even if some subjunctive moods are included in the working drafts, in an emergency they can cause the DeFi sector in the EU to be severely weakened. Nothing is final yet, but the likelihood of significant cutbacks in decentralized finance applications is significantly higher than with the averted ban of Bitcoin. In contrast to the highly controversial Bitcoin ban, which did not have a majority in the EU Parliament, Commission or Council of Ministers, the Funds Transfer Regulation’s clampdown seems different. Apps with so-called non-hosted wallets could be particularly affected by the regulation.
The attack on unhosted wallets
If you want to keep your private keys yourself, you can use a non-hosted wallet. Also common terms are non-custodial wallet or self-hosted wallet. With these wallets, the crypto investor himself bears all the responsibility. This means that he is independent from the intermediaries who take care of the custody and also control it. The latter, in turn, would be called a hosted or custody wallet. The reasons for non-hosted wallets are, above all, the use of DeFi applications, the protection of one’s own privacy, the fear of stock market hacks or possible state intervention in the crypto assets themselves.
If the new or revised paragraphs of the TRF have their way, transactions between non-hosted wallets and crypto service providers in the EU might no longer be legally possible without excessive bureaucracy. Crypto firms were already expecting severe cutbacks, but the revised 22nd, 29th, 33rd and 44th paragraphs are significantly more threatening to the DeFi sector than previously expected.
Funds Transfer Regulation ignores blockchain technology
Among other things, crypto service providers must not only collect the personal data of users from their own wallets, but also verify them in a complex way, regardless of the amount (paragraph 22a). Transactions over 1,000 euros must also require an additional report to the competent control authority (paragraph 33a).
In plain language, this would mean that if you connect, for example, your non-custodial Metamask wallet to an NFT platform or DeFi platform, you will initiate verification processes that are comparable to opening a brokerage account and more. Politicians seem to have completely forgotten that all transactions are already recorded on the respective blockchain. Instead, operators provide additional, sometimes expensive and time-consuming identification procedures.
Nobody can currently explain how crypto service providers working with non-hosted wallets could meaningfully implement this. The result could be that companies are financially forced to stop transactions with non-hosted wallets. Therefore, automation, as provided by smart contracts, is taken to the absurd. It would no longer be possible to take full advantage of blockchain technology.
Is there even a ban on non-hosted wallets?
In addition to the complete dissolution of privacy, the TRF working document foresees a possible tightening of the measures already after 12 months from the entry into force of the TRF (paragraph 44a). Simply put, a reassessment should be done after 12 months and then even more stringent requirements should be issued if necessary. The concern here is that the current TRF draft is just an interim step towards finally banning non-hosted wallets altogether.
In perspective, the question arises to what extent peer-to-peer transactions between non-hosted wallets will remain attractive in the future. Finally, there is the risk that you will no longer be able to use them for commercial purposes.
If the “red flags” in the TRF working document were to pass the voting process in their current form, this would not only cause massive damage to crypto companies, but also ignore and limit the logic and potential use of the blockchain technology. After all, there is no attempt to regulate air traffic in Germany with road traffic regulations.
In view of the high relevance and significant consequences of the Funds Transfer Regulation, BTC-ECHO will continue to report and classify developments in the regulation in the coming days.
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