As Cryptocurrencies and blockchain become mainstream, one of the myths about it that have endured is their association with crimes such as money laundering, terrorism, and the likes. Perhaps because of its counter-culture origins and anti-establishment beginnings, many, especially in the government circles, connect it to the dark parts of the web.
Although this is far from the case, these views have influenced the regulations surrounding Cryptocurrencies since many of those who hold these views are regulators. In a move to curb the imagined financial crimes through Cryptocurrencies, the European Commission has proposed a new set of rules that could seriously affect the Cryptocurrency sector in general.
The European Commission proposed creating a new body, Anti-Money Laundering Authority (AMLA), which will improve and enforce the rules surrounding financial crimes to prevent money laundering and terrorist financing. But the part of the proposed rules that affect cryptocurrency is the one that requires Cryptocurrency exchanges to collect information about their customers. This will ensure compliance with the Know Your Customers (KYC) rules which other financial institutions are already bound to comply with.
What Effect Would the Rules Have on Cryptocurrency Trading
The proposed law will affect the crypto sector in general, marking a substantial change from the EU anti-money laundering and terrorism funding rules already in place and applicable to some in the industry. In practice, this means that crypto service providers like the exchanges will have to carry out due diligence on their customers.
Implementing these rules will mean that digital assets will be similar to fiat when it comes to transactions. In addition, the travel rule will apply to all crypto transactions, which will make it possible to trace crypto transactions directly from the source.
For this to happen, crypto service providers will have to collect information about users such as names, date of birth, address, account number, and the recipient of the crypto funds being transferred.
The law may also mean the end for anonymous wallets, which have become ubiquitous with cryptocurrency. In The same way, anonymous bank accounts have been outlawed by EU laws; crypto wallets will have to be transparent so that crypto transactions can be fully traceable.
However, it’s important to point out that the proposed EU laws on crypto don’t mean a straight-up ban on anonymous crypto wallets. Instead, what would be prohibited under the law is for crypto service companies such as exchanges to provide anonymous services for those on their platform. This means wallets and accounts on exchanges and other crypto service providers will not be anonymous. But individuals can still have access to anonymous wallets and use them for self-custody.
This clarification is essential given that any outright ban of anonymous wallets will be nothing short of draconian. Moreover, since crypto wallets, just like web browsers, are anonymous by default, banning anonymous wallets looks almost impossible. The commission’s failure to clarify this in its release further shows the ignorance of regulators about crypto.
How the Proposed Laws Could Cause Crypto Centralization
If implemented, the proposals by the European Commission mean that European laws on Cryptocurrencies will be uniform. The harmonization of laws is a positive for the crypto sector as it means the regulatory burden is minimized as crypto services only have to comply with the same laws to operate all over Europe. According to the commission, this will drive innovation and help the crypto industry.
The crypto sector will become more like the traditional financial system with a harmonized framework in a mostly transparent system. In the opinion of Yuliya Barabash, the Managing Director at SBSB,
“it’s not surprising that cryptocurrency will be as controlled as fiat – it was expected. It is a matter of time when the tools of influence and tracking will be ready. Will the European Parliament manage to monitor crypto wallets and crypto transactions? Yes, it will. No doubt, it will not happen in a month or two. I assume that they can implement it all in a year or two.”
She further added,
“We don’t have to go far, we can remember BEPS. Once we didn’t believe that every $500 would need to be justified. I mean, where you got it from, how you earned it. We didn’t think that countries would soon automatically exchange tax information. Nobody planned this either, but it only took 2 years for the whole of Europe to start working on BEPS.”
Barabash pointed out that
“The new law of the European Commission is aimed at combating ‘dirty’ money, like fiat, and even more crypto. It’s obvious that transactions and volumes that are transferred in cryptocurrency are enormously large; they exceed fiat in volume, because it is anonymous, because transfers can be made in large volumes at once.”
For those wondering about the possibility of implementing the proposal, Yuliya Barabash believed that it’d likely happen in the next few years. According to her,
“Just like the government obliged financial institutions under BEPS to provide information about account holders, in the same way, crypto exchanges and exchanges will carry out deep, comprehensive wallet compliance. And it seems, at first glance, crypto exchanges will not want to cooperate with the government, with regulatory authorities. But I think that the government will first oblige large and well-known crypto exchanges to comply, which, in the future, will lead to the fact that the majority will want to work with trusted crypto exchanges. It used to be the same with banks and licensed crypto institutions.”
The growing popularity and adoption of Cryptocurrencies in recent times have led to calls for regulations. With European Commission proposals which would most likely be implemented within two years, other jurisdictions are expected to follow rules. If these laws should mirror what the EU has, we can expect more centralization in crypto.