European Parliament to vote on mandatory verification of DeFi wallet users

On March 31, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) will vote on amendments to the regulation on information sharing between counterparties in transfers of funds. The proposal would collect data on users of non-custodial cryptocurrency wallets, according to Patrick Hansen, growth lead at Unstoppable Finance.

2/ Background: The EU Commission’s AML package includes a revision of the Transfer of Funds Regulation (TFR) that will extend the obligation of financial institutions to accompany transfers of funds with information on the payer and payee to crypto assets.

— Patrick Hansen (@paddi_hansen) March 26, 2022

According to Hansen, the measure is aimed at implementing the FATF’s “travel rule.” The latter obliges providers of crypto-related services such as exchanges and custodial services to share information about their customers when transferring transactions.

The European Parliament is currently considering the proposed amendments. Hansen stressed that the draft amendments published by the body tighten the requirements for collecting and sharing data when conducting transactions with non-custodial wallets.

6/ Different from the initial proposal that only required to collect (not verify) personal data from transfers made from/to an unhosted wallet, the draft now requires to “verify the accuracy of information with respect to the originator or beneficiary behind the unhosted wallet” pic.twitter.com/aqRHVVjuXg

— Patrick Hansen (@paddi_hansen) March 26, 2022

“In contrast to the original proposal, which required only to collect (but not verify) personal data for transfers from/to unhosted wallets, the draft now requires to ‘verify the accuracy of information regarding the originator and the beneficiary behind the unhosted wallet’,” he wrote.

The specialist explained that providers of crypto-asset-related services physically cannot verify a non-custodial counterparty. In his view, the bill, in its current form, will compel cryptocurrency companies to refrain from transactions with such services to comply with regulatory requirements.

The draft also envisages the possibility of introducing “additional special measures to reduce risks associated with transfers to/from non-hosted wallets, including potential restrictions” one year after the law comes into force.

10/ This means that the EU Commission might be prohibiting transfers from/to unhosted wallets entirely, as was already suggested by some members of the Parliament in an earlier draft — see Art 18 b on page 45 here:https://t.co/3utlRA69nC

— Patrick Hansen (@paddi_hansen) March 26, 2022

“This means that the European Commission could completely prohibit transfers to unhosted wallets, something that had already been proposed by some Members of Parliament in the earlier draft,” Hansen explained.

Among other things, the document envisages information sharing on all cryptocurrency transfers, regardless of size. At the same time, for fiat currency a minimum threshold of €1000 is set.

“In order to facilitate tracing of related transfers and to prevent improper use of digital assets to facilitate, finance and conceal criminal activity and money laundering, the de minimis threshold should not be set for cryptocurrency transactions,” the draft says.

If ECON approves, the bill will be referred to the European Commission and the Council of the EU for consideration. Substantial changes may be made to the document before final adoption.

Earlier, by a majority, approved the cryptocurrency regulation bill. The final version did not include the amendment to ban mining under the Proof-of-Work consensus algorithm.

In 2022, the US Treasury is set to revisit the controversial FinCEN proposal that would require mandatory verification of non-custodial cryptocurrency wallet users.