Shankar Iyer
The cryptocurrency market could soon witness headwinds from the European Union’s latest policy proposal and directives related to the transfer of funds and crypto-assets. With this policy, the European Commission hopes to curb potential money laundering and terror financing activities routed through cryptos. The traceability criteria under this proposal is also a part of the Financial Action Task Force (FATF) recommendations. In fact, it is actively applied for wire transfers.
A similar law was being considered by the US Treasury’s FinCEN (Financial Crimes Enforcement Network) under the Trump administration. However, the policy was suspended after President Biden took charge.
EU’s policy on traceability of crypto-asset transactions
The proposed policy would directly impact cryptocurrency exchanges, crypto wallets and other crypto service providers. Reuters cited a statement from the Commission which said that “Today’s amendments will ensure full traceability of crypto-asset transfers, such as bitcoin, and will allow for prevention and detection of their possible use for money laundering or terrorism financing.”
Any company engaged in the business of managing crypto-assets on behalf of the user will have to collect KYC data. Some of the parameters include the name of the customer, date of birth and address, account number as well as the name of the recipient of these transfers. The proposal mandates that the recipient’s service provider is also required to conduct due diligence.
In a tweet, the Commissioner for Financial Services, Financial Stability and Capital Markets Union — Mairead McGuinness remarked that “Our rules will now apply to the whole of the crypto sector. We will ban anonymous crypto wallets and make sure that crypto-asset transfers are traceable.” This decision is bound to affect anonymous wallet service providers and exchanges facilitating crypto fund transfers with little to no KYC standards. However, it is still unclear if this policy would affect non-custodial crypto service providers.
The European Commission believes that implementing this legal framework could lead to the development of a harmonized digital assets ecosystem across the EU. The proposal is yet to be ratified and could take up to two years to become the statutory norm in the EU.
Why does the EU want to trace crypto transfers?
Bitcoin and other tokens/coins have always scored brownie points among crypto enthusiasts when it comes to the anonymity of transactions. But Mairead McGuinness is of the opinion that cryptocurrency is the “newest” way for money laundering.
CNET cited the research by Chainalysis — a blockchain data and research platform, which estimated that cryptocurrencies worth over USD 2 billion were laundered last year. The report also suggests that 270 blockchain accounts were involved in laundering approximately 55% of the total value.
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