We’ve had no shortage of legislative FUD (fear, uncertainty and doubt) in the past 12 months, but this time it’s different.
The European Parliament Committee on Economic and Monetary Affairs (ECON) has voted in favor of a crushing proposal that could stifle crypto and decentralized finance (DeFi) as we know it.
There’s no way to spin it: this is extremely bad.
Let’s examine what happened, and what the implications could be.
TL;DR:
- Details of the proposal.
- Is this contributing to the market dip?
- All our data is at risk.
On Thursday March 31, 2022, the ECON voted in favor of a proposal that cracks down on unhosted digital asset wallets.
The proposal includes a revision of the Transfer of Funds Regulation (TFR) that will extend the obligation of financial institutions to accompany transfers of funds with personal information of the involved parties (a long-winded way of saying know-your-customer, or KYC).
The worst parts of the proposal
- Crypto service providers will now have to collect and verify the personal data concerning involved parties of crypto transfers when an unhosted wallet is involved. No information has been provided as to how this should be achieved…
In a worst-case scenario, it could lead to many service providers outright stopping transfers to and from unhosted wallets, at least temporarily, until some light is shed on the issue. The increased logistical cost could mean the smaller exchanges outright ban these transactions for good.
It also means that no one is safe. For example, if someone in the Antarctic is looking to send USDC from their MetaMask to someone in the EU’s Coinbase wallet, they will also need to have their data recorded, even though they are not actually a Coinbase customer. In effect, everyone becomes a customer and will need to fill out a KYC form.
Further, users will be more likely to leave their assets on the third-party exchanges, so as to avoid the headaches… as the saying goes, not your keys, not your coins!
- Any transfer over 1,000 euros will have to be reported to the Anti-Money Laundering (AML) authorities. This will apply to all transactions, regardless of whether it looks suspicious or not.
This constitutes a major violation of personal privacy. As Coinbase CEO, Brian Armstrong, said “Imagine if the EU required your bank to report you to the authorities every time you paid your rent merely because the transaction was over 1,000 euros.”
- One year after the proposal is passed, the EU commission will reassess to find “additional specific measures to mitigate the risks posed by transfers from or to unhosted wallets, including the introduction of possible restrictions”
This could mean a complete ban on any kind of transfer involving an unhosted wallet, as was already suggested by some members of the parliament in an earlier draft (see Article 18 b on page 45 here).
You are not safe anymore
Crypto exchanges and services gathering all this data will have to store it on a centralized server that could be susceptible to a breach.
Imagine hackers knowing that you own a Ledger containing 10 bitcoin. The risk of a “$5 wrench attack” can’t be discounted.
Banter’s take
This proposal dramatically undermines some of the core precepts and fundamental values at the heart of the space. Yes, this might apply to the EU, but since it concerns any transaction in which only one party falls under its jurisdiction, the implications will extend far beyond its borders.
Should it be implemented in full, or worse yet, with further draconian measures included, it could stifle developer activity, with devs (developers) unlikely to pursue involvement in a protocol that could be subject to an immediate ban. Venture Capital may well stop pouring their money into projects if they fear that their investments will be lost.
But there is still hope. This proposal won’t be implemented in full until 2024, meaning there is time to mount a meaningful campaign that could halt the proposal in its tracks.
