Jul 5, 2022 - Economy & Business

EU lawmakers want to track crypto transfers

Illustration of eyes in the pattern of the EU flag looking around and turning into cubes.
Illustration: Brendan Lynch/Axios

Lawmakers in the European Union last week reached a provisional agreement that extends traceability requirements to include digital assets.

Why it matters: Privacy is central in crypto. The industry has long argued as much, with more than 40 crypto firms in April protesting transaction detail disclosures in a letter to the EU.

Driving the news: The new transfer of funds regulation, or TFR for short, appears to have been accelerated amid heightened awareness of illicit activities behind crypto transactions.

What's happening: The Financial Action Task Force (FATF) urged crypto service providers and other financial institutions to get started on tracing transactions, requiring them to collect and share personal information (regardless of size) and hand that info over to authorities if they so require.

  • Crypto service providers, as defined by FATF, include those "acting as a business for or on behalf of another person and providing or actively facilitating" crypto services.
  • FATF is comprised of 37 member jurisdictions and two regional organizations.
  • The so-called "travel rule," which already exists for traditional financial firms, requires that information on the source of the asset and the beneficiary be stored for digital asset transfers.

The big picture: TFR is pointed at shoring up anti-money-laundering and countering terrorism financing (AML/CTF) rules, and demonstrates a slight shift in posture from EU lawmakers toward digital assets.

  • The AML rules are meant to complement FATF guidance, as well as Markets in Crypto Assets (MiCA) legislation that was finalized in parallel last week.

Flashback: The EU AML rules date back to the FATF travel rule first recommended in 2019, and most aspects of the deal voted on Thursday had been previously ironed out.

What they're saying: The FATF expressed urgency, saying that more crypto service providers need "to work towards full compliance."

  • "Of the 98 jurisdictions that responded to FATF’s March 2022 survey, only 29 jurisdictions have passed relevant Travel Rule laws, and a small subset of these jurisdictions have started enforcement," a FATF report published last week said.

What others are saying: "Compared to what has been discussed in Parliament, there are aspects that got better from an industry perspective," said Patrick Hansen, a crypto venture advisor at Presight Capital.

Between the lines: TFR appears to have been eased around peer-to-peer crypto transactions but boned up for service providers.

  • Privacy is maintained between peer-to-peer transfers, but for transfers between crypto service providers, a previously proposed limit of 1,000 euros is gone, and traceability requirements apply to any amount of crypto transferred.
  • Additionally, crypto service providers interacting with customers' self-custody wallets will have to collect (read: supply) verification information and apply AML measures to wallets belonging to clients making transfers in excess of 1,000 euros.

What we're watching: How crypto service providers will adhere to these rules remains to be seen, but Hansen says exchanges could, for example, require screenshots of identification and signature attestations verifying one's identity.

The bottom line: The industry has much work to do in complying with TFR, and also in reviewing MiCA legislation — a package of rules aiming to provide a sweeping regulatory framework for 27 EU member states that was finalized last week.

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