EU Agrees on Strong AML Checks for Crypto With an Exemption for Unhosted Wallets 

EU policymakers agreed on new anti-money laundering (AML) rules for crypto transactions on Wednesday, June 29. The agreement contemplates that for transactions between digital wallet providers, like crypto exchanges, the parties will need to verify customer identities even for the smallest crypto transfer, as it was originally foreseen in the first draft introduced in July 2021. 

However, lawmakers decided to leave most small payments or transfers to unhosted private wallets out of laundering checks, a departure from the original proposal. Yet, payments to unhosted wallets over 1,000 euros will still need to be reported, in line with similar provisions applicable for transfers in traditional banking. 

“The new rules will enable law enforcement officials to be able to link certain transfers to criminal activities and identify the real person behind those transactions,” said Ernest Urtasun, a Spanish Green Party lawmaker and rapporteur of this proposal. 

With this compromise, both proponents and critics of the rules could claim a partial victory. EU lawmaker Ondřej Kovařík confirmed the provisional deal in a tweet, saying that it “strikes the right balance in mitigating risks for fighting money laundering in the crypto sector without preventing innovation and overburdening businesses.” And for unhosted wallets, he said that the outcome had “moved quite far from the initial proposal of the European Parliament.”

In March, lawmakers voted on a proposal for a “regulation on information accompanying transfer of funds and certain crypto assets” (the so called “travel rule” regulation).  Under this rule, crypto firms such as exchanges would have to obtain, hold and submit information on those involved in a transfer with the purpose of combating money laundering. Initially the rule established a “de minimis” threshold (1,000 euros) below which the rule wouldn’t apply, but this threshold was subsequently removed. Some lawmakers also wanted to expand the scope of the bill to include transactions to unhosted digital wallets and collect the same information.  

The crypto industry showed its discomfort with the new rules, in particular with the removal of the “de minimis” rule. Paul Grewal, chief legal officer at Coinbase, published an opinion urging others to make their voice heard before today’s vote.  

“If adopted, 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.” 

Read more: EU Lawmakers to Vote on Tougher Crypto Transaction Requirements 

For the industry, the decision to leave most of the small transfers to unhosted wallets out of AML rules is likely to be seen as a victory, as they knew that changing the rules for digital wallet transfers would be difficult. However, most companies and the crypto community will wait for the small print in the final version of the bill, as the exemption for smaller payments between unhosted wallets could open a door for illicit transactions to go undetected and policymakers will probably want to close this gap. 

Ajinkya Tulpule, chief compliance officer at crypto exchange BitFlyer, told PYMNTS in an interview in May that the parliament’s decision to apply the travel rule to any crypto transaction seems excessive, but it was nonetheless likely to be approved. “A lot of exchanges have lobbied hard against it, as you can imagine, but from what I heard from a chat with an MEP recently, the majority of the MEPS are in favor of removing the threshold. So it’s not great news,” Tulpule said. 

The agreement among EU lawmakers and representatives of the member states will still need to pass several hurdles before it gets formally approved by the Parliament and the EU Council, but yesterday’s agreement paved the way for an ultimate approval. This deal came on the last day that France holds the presidency of the EU Council before it hands it over to the Czech Republic, which probably will seal the deal.  

Read more: EU Lawmakers to Discuss Fate of NFT, Private Wallets in Crypto Regulation 

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