Crypto Privacy Positions Harden Ahead of Crunch EU Vote

Lawmakers don’t appear swayed by crypto industry claims as they consider applying anti-laundering identification rules to the sector, but some argue the EU plans are unworkable or unlawful.

AccessTimeIconMar 28, 2022 at 8:08 p.m. UTC
Updated May 11, 2023 at 4:27 p.m. UTC
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The crypto industry is sounding the alarm over new European Union rules due to be agreed Thursday, which they say would invade privacy and treat new technologies less fairly than cash or traditional bank transfers.

Those arguments don’t appear to have swayed key lawmakers, who remain adamant that tougher rules are needed to stop crypto being used to process dirty money. Others, however, have argued the proposals currently on the table could be unworkable or even unlawful.

Big players in the sector including Coinbase (COIN) have already come out swinging against the so-called travel rule, which would extend anti-money laundering identity checks to payments made in digital currencies, even if they are under an existing threshold of 1,000 euros ($1,098).

“This revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets,” said Coinbase Chief Legal Officer Paul Grewal in a blog post on Monday.

“The truth is that digital assets are in general a markedly inferior way for criminals to hide their illicit financial activity,” he added, saying the immutable nature of blockchain technology makes it less attractive to those with something to hide.

Parliamentarians are also seeking to extend the checks to cover privately managed unhosted wallets that store crypto, despite fears that such rules could prove unenforceable. Paul Tang, one of the members of the European Parliament on the Economic Affairs Committee that will vote on the matter later this week, was unbowed by what he called a “social media storm by crypto bros.”

“Money going to unhosted wallets may end up in the wrong place, for example with terrorist groups,” Tang, a Dutch socialist, tweeted Monday, saying wallet owners would need to be identified just like bank customers are. Another reason to scrap thresholds, argues Tang, is "smurfing," or the practice of coordinating small money transfers to escape threshold rules.

Tang and others may have been swayed by the views of national governments keen to scrap anonymity, and by officials who tell them crypto is used to fund terorrism and child porn. Others, though, argue that any decision they take could end up getting vetoed by judges. “The travel rule … is really a massive and indiscriminate personal data collection and transfer scheme,” said Mikołaj Barczentewicz, associate professor at the U.K.’s University of Surrey and Fellow of Stanford Law School, told CoinDesk in a written interview Monday.

Proponents of the new rules, Barczentewicz continued, are “saying that it is necessary for all crypto service providers to transfer sensitive data of their clients, even when there is not even the slightest suspicion of a criminal connection." That privacy restriction “is very likely not as effective as less rights-restricting alternatives,” he said, even were the 1,000 euro limit maintained – and all the more so because those with nefarious aims could simply circumvent them.

Legally speaking, the claim the rules go further than they need to is not just a soundbite, he added. In a 2014 case, the EU’s highest court struck down laws requiring phone companies to keep call data, saying that the invasion of privacy went way beyond what was needed to help the police fight terrorism. “The analogy is very clear."

If the new rules are passed and subsequently challenged in national courts, said Barczentewicz, “the EU Court of Justice will then have the power to invalidate the rules if it finds that they conflict with the EU Charter of Fundamental Rights,” which safeguards the right to privacy.

“What we seem to be dealing with here is an attempt to do ‘something about crypto and crime,' without a serious, evidence-based reflection on how best to do it,” Barczentewicz concluded.

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CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Jack Schickler

Jack Schickler was a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He doesn’t own any crypto.


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