EU’s ban on anonymous digital currency transfers—a deep dive

Last week, CoinGeek reported that the European Union (EU) was planning to ban anonymous transfers of “crypto-assets.”

The news received applause from some sectors of the blockchain industry and opposition from others. Nonetheless, these proposals are going ahead, and after looking deeper into the details, there’s a lot to unpack and contemplate.

What exactly will the new EU regulations focus on? How will they be enforced? What do they mean for crypto and the wider blockchain industry? Here’s a breakdown of what the EU’s official documentation reveals.

What is the EU trying to accomplish?

While some will say that the EU is trying to implement a regime of digital fascism, in reality, its goals are focused on crime reduction. The EU wishes to:

  • Strengthen its existing Anti-Money Laundering and Countering Finance of Terrorism regulations.
  • Add some new regulations, including a revised list of entities they will apply to.
  • Increase detection of money laundering and terrorism financing and a greater ability to stop it.

The new regulations follow an analysis of the effectiveness and efficiency of existing AML/CFT rules. The analysis found weaknesses and areas for improvement.

Europol, the EU’s law enforcement agency, estimates that as much as 1% of the EU’s $15.1 trillion GDP is linked to suspicious financial activity. After some high-profile money laundering scandals a few years back, the EU is determined to reduce that percentage.

What will the new rules involve?

There are a few elements to this, but essentially the new rules will involve the establishment of an EU-wide enforcement agency called the Anti-Money Laundering Authority (AMLA), the harmonization of rules across the various nations in the EU, and new information gathering and reporting requirements.

The AMLA will have up to 250 staff members. It will be established in 2023, will begin its activities in 2024, and will begin the supervision of high-risk entities by 2026.

What this means is that EU-wide enforcement of the rules will apply to all member states. You could think of the AMLA as a federal enforcement agency designed to specifically detect and stamp out money laundering and terrorist financing. All nations in the EU will answer to it.

Who will be subject to the new rules?

Financial institutions which will be subject to the new regulations are called “Obliged Entities.” And yes, this list will include any and all companies in the digital currency industry.

Obliged Entities will be selected by the AMLA based on risk criteria and the nature of their transactions. This list will be reviewed every three years.

Any entities on the list will be required to:

  • Conduct customer due diligence.
  • Report suspicious activity to national Financial Intelligence Units.

Obliged Entities currently include almost all financial entities like insurance companies, banks, and payment service providers. Lawyers, accountants, casinos, real estate agents, and crypto-asset providers will be included.

How does this affect the digital currency industry?

The new EU regulations will have a dramatic impact on the digital currency industry and will bring about widespread changes.

Legally, the new proposals include an amendment to a 2015 regulation on money transfers. The amendment will extend regulation (2015/847) to cover crypto-assets. Full information about the sender and beneficiary will need to be collected. The aim is to identify suspicious activity and, if necessary, block them.

Here we see how anarchist ideas such as “uncensorable money” based on technical fixes are pie in the sky pipe dreams. Access to and exit from such systems via fiat ramps will become near impossible, and the entities that run such systems will be subject to the new regulations.

The rules will even require digital currency service providers to apply for licenses and submit senior managers to “fit and proper tests.” The opening and use of anonymous digital currency asset accounts will be banned. This means that all digital currency exchange accounts and wallets will be KYC checked.

Digital IDs and cash transactions

Digital identities are a hot topic in digital currency land. Some see the benefits of them, while others decry them as a surveillance tool and a toehold for tyranny.

The EU’s new rules specifically mention digital IDs as “essential” for citizens and businesses to access digital services. We already know some details about the EU’s new digital wallet, and we know that it will be linked to the user’s identity. This recent statement makes it sound like a key component in a much larger system and confirms the push towards a full digital identity regime in the EU.

The EU said it is currently establishing a legal framework for interoperable digital identity solutions. This will allow citizens and businesses to access financial services quickly and easily. It will presumably allow high-risk individuals and entities to be blocked from accessing such services or subject to increased monitoring.

The bloc also took direct aim at cash. It referred to cash as the “preferred medium for criminals” due to it being difficult to trace. A proposed new rule would impose a maximum cash transaction value of €10,000. Member states will be free to impose lower limits.

Third countries and blacklists

Reading the official summary of the new regulations, we learn how the EU plans to deal with so-called “third countries” and their interactions with the EU financial system.

Third countries, which would include nations like U.S., U.K., and further afield, will be subject to monitoring and can be put on both grey and black lists for having weak AML/CFT rules or enforcement.

In our previous article detailing the announcement of the ban on anonymous transactions, we mentioned that the EU has enough financial weight to put pressure on other nations to follow suit. Obviously, these lists are one way of doing so.

It’s not entirely clear what the consequences of being put on such lists would entail, but being subject to enhanced monitoring would be the bare minimum. Perhaps the EU could even ban certain countries from interacting with its financial system unless they adopt similar AML/CFT regulations?

Where is all of this going?

The EU is renowned for its strict financial regulations. It clearly believes the existing regime isn’t strict enough, and it’s determined to take further measures to stamp out money laundering, terrorist financing, and other criminal activity.

It’s not difficult to see where all of this is headed. With the implementation of the digital euro, digital identities linked to wallets, and new regulations allowing for increased oversight and enforcement, the EU will become an increasingly unfriendly jurisdiction for criminals or those who play fast and loose with the law.

Digital and virtual currencies will not escape the net. Claims about decentralization and immutability are easily debunked. Even Uniswap, an allegedly decentralized exchange, began removing and limiting access to certain tokens recently. Binance has also found itself under fire from regulators around the world and is moving quickly in an attempt to shape up before it gets shut down.

As the EU implements these new rules, it’s a safe bet that other nations will be watching and thinking along similar lines. As one of the largest trading blocs on earth, most countries will want to stay on the right side of the EU to maximize opportunities for trade and financial interaction. For example, if it became impossible for migrant workers to send remittances from the EU to some countries due to weak AML/CFT regulations, the financial pinch would certainly be felt quickly. Presumably, those nations would want to remedy that situation as quickly as possible. So, we can see how what happens in the EU could have a much wider impact around the world.

Knowing this, we can deduce that systems like Monero and entities such as non-compliant exchanges are doomed. On the contrary, systems like BSV enterprise blockchain are set to enter a golden era where the long-term strategy of playing by the rules pays off dividends.

Watch: CoinGeek Zurich panel, Blockchain Law & Policy

New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.

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