Europe is getting ready to drastically tighten cryptocurrency regulations

    31 Jul 2021

    Europe is about to take a major step towards “Sinification” by introducing total control over the cryptocurrency operations of its citizens. European regulators decided that they had found a way of denying anonymity to any cryptocurrency dealings.

    Ever since the first real crypto boom in 2017, European financial regulators have taken an ambivalent position regarding digital money. On the one hand, they do not want to impose any unnecessary preventive restrictions. On the other hand, Europe is typically terrified of money laundering and strives to keep the financial life of its citizens under control.

    In recent years, the two approaches mostly alternated at different times. But now supporters of total control seem to be gaining the upper hand.

    On July 20, the European Commission presented a bill that, if adopted, will ban the use of anonymous electronic wallets for cryptocurrency transactions in the EU. According to officials, such a measure would significantly reduce opportunities for money laundering and financing of extremists. The document also proposes to amend the EU Regulation No. 2015/847 to improve the mechanism for monitoring cryptocurrency transactions of European consumers. And finally, the European Commission proposes to make it easier for supervisory authorities to look into parties of suspicious transactions and owners of assets, including digital ones.

    As usual, all this is under the auspices of strengthening the EU Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) rules. This way, European lawmakers plan to improve the detection of suspicious transactions and activities and close the loopholes used by criminals to launder illegal proceeds through the financial system. In addition, virtual currencies in the documents accompanying the bill are directly referred to as “new problems”.

    Moreover, problems of such a scale that a new bureaucratic body will be created to “solve” them – the EU-level Anti-Money Laundering Authority (AMLA). A unified EU AML/CFT rulebook is also being introduced in order to harmonize financial transparency rules across the EU member-states.

    The authors of the bill note with almost palpable regret that only certain categories of cryptoasset-related service providers currently fall under the AML/CFT rules. The proposed reform will extend these rules to the entire crypto sector, requiring all service providers to conduct due diligence on their customers. “Today’s amendments will ensure full traceability for transfers of cryptoassets such as bitcoins and allow to detect and prevent their possible use for money laundering or terrorist financing. In addition, anonymous cryptoasset wallets will be banned”, – says the document.

    Until recently, those same regulators in Europe have tried a different way of combating anonymous cryptocurrency transactions. For example, officially registered cryptocurrency exchanges were “strongly recommended” not to trade cryptocoins that provide real transaction anonymity e.g. Monero. However, the proliferation of DEX and other decentralized financial projects clearly forced European lawmakers to look for other ways of controlling their own citizens, authorized cryptocurrency wallets being one of them.

    Here is where the inevitable question arises: how do you pull that off? Technically, it is so difficult you are left relying on the law-abiding nature of Europeans. Which, should be mentioned, is often exaggerated. After all, a European crypto user can set up two wallets for himself, one anonymous and one verified, with his personal data. So, it is quite likely that the next step will involve banning transactions between authorized wallets and decentralized crypto exchanges (DEX) and exchangers. Those decisions by the European legislators would divide the crypto market into legal and underground sectors (though underground doesn’t mean criminal). When and how such a division will backfire is hard to say, but in any case, the consequences will be negative.

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