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New transfer rules have been voted through by members of the European Parliament (MEPs), igniting frustration among the crypto industry who feel like they are being unnecessarily targeted.
On Thursday (March 31), MEPs from both the Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties (LIBE) adopted, with 93 votes for, 14 against and 14 abstentions, their position on draft legislation strengthening EU rules against money laundering and terrorist financing.
Specifically, this states that crypto-asset transfers would need to be traced and identified to prevent their use in financial crime.
These rules were going to arrive in some form or another across the EU, with the travel rule expected to be implemented by members of the Financial Action Task Force.
However, parliamentarians have decided to push ahead with a tougher stance compared to the European Commission, which had originally proposed an information-sharing requirement for transfers of more than €1,000.
Under the new requirements agreed by MEPs, all transfers of crypto-assets will have to include information on the source of the asset and its beneficiary, information that is to be made available to the competent authorities. The rules would also cover transactions from so-called unhosted wallets (a crypto-asset wallet address that is in the custody of a private user).
Due to their speed and virtual nature, crypto-asset transactions can easily circumvent existing rules based on transaction thresholds, MEPs suggested in defence of their removal of the commission’s proposed threshold.
“Illicit flows in crypto-assets move largely undetected across Europe and the world, which makes them an ideal instrument for ensuring anonymity,” said Ernest Urtasun, Green MEP and co-rapporteur for the legislation.
As illustrated by all the recent money laundering scandals, from the Panama Papers to the Pandora Papers, criminals thrive where confidentiality rules allow for secrecy and anonymity, he noted. “With this proposal for a regulation, the EU will close this loophole.”
Meanwhile, his colleague, Assita Kanko, who sits with the right-wing European Conservative and Reformist Group, said that the European Parliament was seeking to protect and normalise crypto-asset use.
“We should be facilitating the use of crypto-assets by people of goodwill safely and correctly, as well as protecting against the use of crypto-assets for terrorist financing, extortion, child sexual abuse material or money laundering.”
“But we also seek to normalise the crypto world as it grows, implementing rules that create trust,” she continued. “More than a decade after the creation of Bitcoin, it is high time we took these important steps for our citizens.”
Industry response
The move has triggered agitation among crypto players operating across the EU.
It is a de-facto ban on private and self-hosted wallets, said Antonio Lanotte, senior manager at Italian law firm DMG Partners. “This position clearly kills Web3, where private wallets could play a critical part in proving identity using public-private key infrastructure as well as non-custodial wallets.”
“This is a disappointing anti-innovation approach,” he said.
In particular, Lanotte argued that this approach by the European Parliament contrasted with the European Commission’s Blockchain Strategy for Europe, which aims to build a pan-European public services blockchain and promote legal certainty.
“There was strong political pressure in both the European Parliament and the Council to do away with the exemption,” said Jerome Dickinson, chief legal counsel at OSOM, a crypto platform.
Philosophically, the debate is on how to qualify crypto transactions, he continued. “With a cash payment below €3,000, you don't need to provide extra information. With crypto, there is no material money laundering risk when talking about small transactions, so I don't see why governments should cast a wide net.”
“There are a lot of fantasies about money laundering risks in crypto, considering most illegal activity doesn't happen on exchanges,” Dickinson suggested.
"It is an ill-informed move from the European Parliament. The proportion of suspect transactions is fairly small when compared to cash,” said his colleague, Mathieu Hardy. “What is even less comprehensive is that if you speak to law enforcement, they seem to agree.”
Europol put out a report earlier this year that suggested that the risks from crypto are very similar to those from other forms of finance, in spite of the heightened concerns surrounding the industry.
“Criminals prefer to stick with cash, and only stupid criminals do crypto transactions now as they are easy to track,” he said. “The community is even doing a good job at policing itself, and after thefts, we are seeing attackers returning funds to original owners as it's nearly impossible to launder under all the scrutiny."
Others were more sympathetic to the MEPs' approach.
According to various studies, the amount of money laundering with crypto-assets is very low, said Edo Bakker, chief executive at Agile Control Solutions, an AML consultancy. “On the other hand, it does have various benefits, for example, to stop smurfing, which is money laundering through a high number of low transactions, and it prevents the financing of terrorism, which can also be financed with relatively low amounts.”
The aim of the law is to ensure that crypto transfers can be traced and suspicious transactions blocked, MEPs in favour of the amendment argued. The rules would not apply to person-to-person transfers conducted without a provider, such as Bitcoin trading platforms, or among providers acting on their own behalf.
Not all MEPs were in favour. Eva Kaili, a Greek MEP on the centre-left wing of the European Parliament, tweeted: “No matter what happens today, there is a need to discuss further in the European Parliament. We will host workshops with experts and work with colleagues that have the best intentions, for a proportionate responsibility of EU CASPs [crypto-asset service providers].”
Transfer of funds from unhosted wallets to EU CASPS should be possible in a proportionate way, she also tweeted. “Otherwise (sic) EU risks circumvention of EU infrastructure via non-EU providers. To fight crime and corruption while remaining tech neutral and innovation-friendly.”
For now, however, the vote has led to a clear wedge between Brussels politicos and the industry.
"Crypto providers keep being treated like criminals by MEPs and regulators. It is misguided as, in our circumstance, for example, we have been operating since 2019, and have sought to be regulated,” said Hardy, who serves as chief development officer at OSOM.
He continued: “We chose to be in a country where there was a regime around crypto which forced us to follow AML rule, even when we could have started in Belgium or Spain where there were no formal supervision regimes.”
Hardy’s company is not alone, he said, pointing out that both Bitcoin Suisse and Coinhouse have been working with regulators to seek a banking licence. “Crypto entrepreneurs don't get into this field so that they can finance terrorism, but for some reason, it seems to be the default opinion of some authorities.”
“At some point, yes, someone probably used bitcoin to buy drugs on the silk road, but the VHS was used for morally reprehensible acts too,” he quipped.
New register
As well as the enhanced travel rule requirements, MEPs said that they want the European Banking Authority (EBA) to create a public register of businesses and services involved in crypto-assets that may have a high risk of money laundering, terrorist financing and other criminal activities.
This register will also include a list of non-compliant providers.
Before making the crypto-assets available to beneficiaries, providers would have to verify that the source of the asset is not subject to restrictive measures and that there are no risks of money laundering or terrorism financing.
Parliamentarians may have been inspired by Jose Manuel Campa’s letter to European lawmakers last week.
The EBA chief said that lawmakers should consider amending the EU’s financial crime package to ensure that the new Anti-Money Laundering Authority (AMLA) has the legal powers to oversee crypto-asset service providers, as well as traditional financial institutions.
