Yesterday the fears of European crypto users came true: The European Parliament voted for tighter regulation of cryptocurrencies. Above all, the discrimination of key custody by wallets is extremely unpleasant – but not the only poison pill. Is the EU saying goodbye to the cryptocurrency market?
The European Parliament yesterday voted on the regulation regulating the transfer of crypto assets.
Members of the committees tasked with this have significantly tightened the EU Commission’s proposal, including by removing threshold amounts and significant discrimination against wallets. Parliament has now voted on this revised version.
It was close, but the draft found a majority. As expected, the Social Democrats, the Greens and the Left Party mostly voted in favor of the draft, while those of the Conservatives or mainstream parties, the Liberals and the right-leaning ECR tended to vote against it.
Of course, this is still only a draft, not a law. In order to become one, a few more steps are required:
First, Parliament will announce the draft in a plenary session. If there is no objection, the so-called trilogue follows: Parliament, the Commission and the Council negotiate the law to find a version that everyone can agree on and which the Council and Parliament then vote on. This trilogue will drag on for a few months and represents the last chance for many to overturn the regulation.
A threat to safety, freedom and location
But what if the law is not prevented?
The French hardware manufacturer Ledger complains that private wallets, i.e. wallets hosted by the user themselves, are apparently primarily a tool of criminals for Parliament. The first and foremost feature of Bitcoin and cryptocurrencies, namely the possibility for users to manage the keys to wealth themselves and autonomously, is close to criminalization. One cannot be too shocked at the mind of whom this idea is born.
According to the hardware manufacturer, the planned regulation also endangers the security of users, harms financial freedom, financial inclusion and consumer protection, weakens the competitive position of the EU compared to American and Asian locations and hinders the work of prosecutors.
Pretty harsh cons. But is that actually the case?
Let’s take a look at the effects of the regulation – and what the consequences are for Europe as a business location.
Three essential consequences of the regulation
First, all crypto service providers will attach extensive data, such as the sender’s address and ID number, to every transaction to other crypto service providers, for example from one exchange to another. This is part of the Commission draft. As a result, the service providers will create a wealth of private, highly sensitive data; the danger that sooner or later these will fall into the hands of criminal hackers and end up on the black markets is enormous.
Secondly, the full information and verification obligation applies to every transaction. There should be no threshold amounts as proposed by the Commission. Parliament deleted them.
Third, Parliament is adding several provisions on wallets. It extends the obligation to collect and check information, in part, to transactions from and to users’ own wallets, and makes a transaction of more than 1,000 euros from them an indicator that a suspicious money laundering report must be submitted to the supervisory authority is.
What consequences all of this will have
The first point seems unavoidable, since the EU is only implementing the FATF travel rule with it. The Travel Rule is the toughest regulatory attack on cryptocurrencies to date, which is why we report extensively and regularly about it. It stipulates that crypto service providers must attach certain private data to every financial transaction, just as banks have long had to. This alone will only temporarily weaken the competitive position of the EU, if at all, since sooner or later the travel rule will apply worldwide.
However, the fact that Parliament wants to remove threshold amounts could weaken the position of the EU, since the FATF does not exclude them. Parliament is thus demanding that the requirements be exceeded without necessity or experience.
Finally, the third point is likely to be the most painful for users and service providers. It will lead to a plethora of suspicious activity reports that can be understood as a DDoS attack on the financial regulator. It will lead to the creation of data that connects blockchain addresses to private data, which can seriously endanger the physical security of investors. It will make it cumbersome for service providers and users to send coins from their own wallets to exchanges, the larger the sum, the more cumbersome. It’s as devastating as Ledger describes it.
The consequence? First of all, the EU is currently sabotaging the crypto industries, where there are world-class companies here. While there are only a few relevant exchanges and marketplaces in the EU anyway, the wallet manufacturers Ledger and Trezor are world leaders – and their product is the one most affected by the discrimination against private wallets.
Then users will increasingly try not to put their coins on exchanges, but to keep them in private wallets. They will think twice about sending coins to exchanges to sell them there and will increasingly use decentralized marketplaces. Under certain circumstances, this will also increase the demand for privacy coins, since the intrusion into privacy through the travel rule is much milder.
So while the regulators are drowning in the flood of reports from regulated exchanges about transactions on transparent blockchains, all users who have something to hide or even just insist on their privacy guaranteed by EU law will increasingly retreat into the darkness of anonymous exchanges and privacy coins withdraw. If the EU plans to fight criminal crypto transactions, it will score a huge own goal.
An own goal is also scored by those members of parliament who hope to “let the air out of the bubble” and weaken the Bitcoin price with this unnecessarily strict interpretation of the travel rule. Presumably the opposite is the case. The more difficult and oppressive it becomes to exchange coins on one’s own wallet for euros on bank accounts, the lower the supply on the exchanges will be – and the higher the pressure caused by demand to increase prices.