The story makes you think twice about what the EU Parliament came up with, as you could on Tuesday read on twitter. The author pointed to April 5, 1933, when the US government prohibited citizens from hoarding gold worth over $100. At that time, the dollar was backed by gold. So the government took away private control of the fundament of money from the citizens – and so the arc closes to the present. Critics there fear that the EU Parliament wants to take away their control over the digital gold of the present, the crypto coins.
So far, they have not really fitted into the established rules and regulations of the financial system. The EU wants to change that, but at some points it encounters resistance from an industry whose self-image is fed by its differentiation from the “old” financial system. Such a point is in the so-called “Transfer of Funds Regulation” surfaced to extend anti-money laundering regulations to the crypto space. The EU Parliament has passed a draft for this. The point of contention is the so-called “unhosted wallets”.
“This takes the idea of decentralized finance ad absurdum”
They are at the core of what technically separates the crypto sector from the world of banking. Anyone who owns a mobile phone can be their own bank, payments run directly from account to account, without going through a central authority, that was the promise when a computer “mined” the first Bitcoin in 2009 – mathematics handles the payment. In the meantime, new service providers such as the crypto exchange Coinbase have established themselves, which take on functions similar to those of traditional banks. Technically, however, it is still possible to operate wallets (accounts) independently of them “unhosted”.
The EU Parliament wants to hold these service providers accountable. They should have to verify who is behind transactions with unhosted wallets. They should then save the information and send it to the financial supervisory authorities for payments over the equivalent of more than a thousand euros.
From the point of view of Kevin Hackl, who heads the Digital Banking & Financial Services department at the Bitkom industry association, this takes the “idea of decentralized finance ad absurdum”. If central instances had to be interposed everywhere to identify the wallet owners, there would be little left of it, he says. Then nothing would work without the new bank-like companies. On the other hand, the innovation for financial solutions, where the wallets remain under the control of the customers, comes to a standstill. Above all, the identification brings little. Contrary to popular belief, the fight against money laundering in the crypto sector is already working extremely well today – but according to completely different technical principles.
What happens when the data on the crypto owners leaks?
The technical foundation of all crypto assets is a so-called blockchain, a transaction database for the entire currency that is unchangeable and publicly accessible. Each circulating amount can be traced back at will. If a wallet related to suspected crimes appears along the chain, the exchange will not accept the cryptocurrency, for example to pay out in a national currency. So what matters is how the wallets behave, not who owns them.
Patrick Hansen from the crypto service provider Unstoppable Finance also warns against transferring the anti-money laundering logic of the classic financial system to the crypto sector. Wanting to operate a wallet anonymously is not evidence of illegal intentions. Since the entire transaction history is public, it would be extremely dangerous if the personal data that is now to be collected in bulk were to leak out in one of the regular leaks. “That will happen.” With just a few clicks, criminals could then see who owns how much and might be a worthwhile target for hacker attacks or even worse, says Hansen. “The risk of such data is much higher than in the classic banking system.” At the same time, the planned regulation is stricter.
Its advocates in the EU Parliament are skeptical about insisting on an anonymous financial market. “All means are right for money laundering”, tweeted left-wing French MP Aurore Lalucq. “Crypto is no exception. Hence the measures.” The planned law will now enter the trialogue with the European Commission and the Council of Ministers before it can be passed.