Europe's Lawmakers Set to Advance Discussion of Controversial Crypto AML Rules

Talks on contentious anti-money laundering rules for the sector are reaching the closing stage, but some hope there’ll be wiggle room on small payments, unhosted wallets and transition periods.

Apr 27, 2022 at 7:00 a.m. UTC

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

Talks involving the European Union’s parliament, commission and council begin Thursday on controversial anti-money laundering rules for crypto transactions, the last stage towards the passage into law of measures that some have said could kill privacy and stifle innovation.

Many in the industry question the premise that tough new rules are needed against a tide of criminal behavior, but more pragmatic voices are looking at the legislative details that could prove crucial – such as how the law will treat small payments and unhosted wallets, as well as when the new law would take effect.

The draft legislation would require crypto providers to verify customer details and report suspicious transactions to the authorities – but the industry has complained it could prove burdensome to implement, and would end digital anonymity.

A last-minute protest led by Coinbase (COIN) and similar companies largely fell on deaf ears, and on March 31 European Parliament lawmakers voted to apply tough money-laundering rules to the sector, arguing the rules were needed to curb crime. Now, attention turns to what the final form of the law will be – where talks are reaching the closing stage.

Both lawmakers at the European Parliament and national government meeting in the EU’s Council have said they want to see tighter monitoring of which parties take part in crypto transactions. They say that should apply even for the smallest payments – unlike for conventional bank transfers where customer identity only needs to be verified for transactions over 1,000 euros ($1,066) – as it’s easier to circumvent by chopping up digital payments into small chunks.

In practical terms that may not make much difference, according to a recent blog by Oldrich Peslar, head of legal at the Rockaway Blockchain Fund.

“I do not think that this is some tragedy” to apply checks to small crypto payments, Peslar said, because it is “all information any compliant service provider could already have,” and gathering it “is not an administrative burden nor any invasion of privacy.”

Challenge

But from a legal point of view, it could constitute an unfair intrusion into personal affairs that could invite a legal challenge, blockchain law expert Thibault Schrepel told CoinDesk.

“You are putting [on] more obligations if it’s crypto-related than if it’s not,” Schrepel, an associate professor of law at the Free University of Amsterdam, said in an interview.

“That would be the worst outcome,” he added, potentially infringing EU human rights law – not the least because money laundering is more widespread using other, more traditional means of payment.

Lawmakers could be swayed by the risk of a legal challenge, Schrepel believes – but in practice it may be difficult to get them to retreat from a position they share with the Council. In other areas there is less consensus on the right approach – and, for the law to become final, lawmakers and governments will have to thrash out their differences in a series of closed-door meetings, beginning Thursday.

That includes the parliament’s proposals to make checks apply to unhosted wallets, and to have a central blacklist of dodgy providers. Those are issues that concern Peslar, warning they could spell the end of privacy-enhancing features such as mixers or currencies like monero (XMR).

Extending bank-style know-your-customer checks to self-guarded crypto holders – such as a wallet not hosted by a central exchange – “isn't aligned with my values,” and is out of line with how cash is treated, he told CoinDesk. “We should protect [the] privacy of people, not destroy it.”

Governments may come riding to the rescue. If the final text edges towards the position of the Council of the EU, representing national ministries, that would mean a better outcome for unhosted wallets, Blockchain for Europe has said.

Yet, the lobby group’s Secretary-General Robert Kopitsch told us, it’s not so much about what the law does, as when.

The Council says the new rules should wait for crypto licensing legislation to take effect, and apply only two years after the separate Markets in Crypto Assets Regulation is finalized. The MiCA legislation, which could allow crypto operators to work across the EU if they meet financial-stability and investor protection norms, is also currently in its closing stages of negotiation.

Lawmakers, however, want to see a phasing in of between nine and 18 months, while French central banker François Villeroy de Galhau on Tuesday said the rules should be implemented by “at the latest early 2024.”

That matters a lot, Kopitsch believes – because crypto providers might decide to drop services altogether rather than face the legal risk of a rushed job.

The timeline for implementing is “actually the biggest problem” of the forthcoming negotiations, Kopitsch said, noting the importance of coordinating with other jurisdictions such as the U.S. “In nine months you cannot do anything.”

Step back

Some would rather take a step back from the fine print of negotiations and remind lawmakers that crypto is not the bogeyman of illicit finance

For criminal behavior “it’s not bitcoin these people are going to use, because it’s traceable,” Pascal Gauthier told CoinDesk, saying that cash and conventional finance would be far more attractive to those seeking to hide than transparent blockchains.

Gauthier, CEO of Ledger, a French company that produces hardware that can be used as unhosted wallets, cited data that suggests trades with illicit addresses represented just 0.15% of transactions last year. (Chainalysis, which carried out the research, also suggests that figure could be as much as double as new dubious activities come to light.)

Claims of widespread illicit behavior “are false arguments that have been debunked,” Gauthier said, adding that lawmakers who actually want to ban crypto all together were using financial crime concerns as a fig leaf.

But there are also plenty of voices urging the EU to press on with strong constraints on the sector – including global standard setters the Financial Action Task Force, officials who warn crypto is implicated in child porn and terrorism, and the European Central Bank’s Fabio Panetta, who likens crypto to a lawless Wild West.

Even if the industry sees those views as a wild mischaracterization of crypto risks, they are bound to color the end result. The final version of EU anti-money laundering laws won’t be admired by everyone, but optimists within the sector are hoping lawmakers will at least make the best of a bad job.

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

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

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