Calm down: Why the EU’s anti-money laundering regulation isn’t scary for crypto

Non-custodial wallets will not be banned in the European Union.

That’s the message crypto industry leaders are rushing to share on their social media channels.

They were responding to erroneous news reports circulating on social media recently that the EU’s Anti-Money Laundering Regulation bans anonymous wallets, following approval of the latest agreement on the legislative text.

Core promises

For crypto users who value the tech’s core promises of decentralisation and removing third parties, losing the possibility of individual ownership and control of their own wallets would have been a heavy price to pay.

It would have meant that only centralised bodies could offer users a place to hold their crypto.

But in fact, the AMLR bill, as it’s known, now has fewer restrictions on what it calls self-hosted wallets and addresses than it had in previous iterations.

‘There is indeed a difference in the treatment of crypto transfers coming to or from self-hosted addresses.’

—  Vyara Savova, European Crypto Initiative

And tech providers with no financial controls, like MetaMask, would be excluded from the regulation.

“There is indeed a difference in the treatment of crypto transfers coming to or from self-hosted addresses and cash payments, but this difference does not constitute a ban,” said Vyara Savova, senior policy lead at the European Crypto Initiative, in a statement shared with DL News.

She was aiming to soothe crypto users’ concerns following misreporting on the impact of the regulation.

Updated rules

So what is the AMLR and what does it actually do?

As the name suggests, this regulation is Europe’s updated anti-money laundering rulebook.

It tightens and adapts rules for financial firms across the EU’s $19 trillion economy, aiming to prevent criminals from using the financial system to handle illicit funds.

The AMLR is currently working its way through the final leg of the legislative journey.

It passed a vote in the European Parliament’s Economic and Monetary Affairs Committee last week.

Next, it must pass a vote from the entire Parliament, expected at the end of April, and receive approval from the EU’s finance ministers before it becomes law.

Firms offering crypto services in Europe are preparing for a new set anti-money laundering rules approved by the European Parliament.

Crypto service providers

The anti-money laundering rules apply to a range of financial firms like banks, asset managers, and crypto asset service providers, or CASPs.

The legislation’s text explicitly names two types of CASP — exchanges and custodian wallet providers.

That means that the new rules will not apply to individuals transacting peer-to-peer.

Customer due diligence

If a crypto transfer amount is lower than €1,000, CASPs must perform basic know-your-customer, or KYC, measures, so that they can identify their users.

For transactions higher than €1,000, customer due diligence measures apply.

Those include basic KYC, as well as longer-term tracking of user behaviour and identity.

This threshold is lower than the equivalent measures on cash. Cash payments are capped at €10,000. Anonymous cash payments, where customers are not identified, are restricted to €3,000.

Self-hosted wallets

For non-custodial wallets, the bill states that CASPs need to apply “measures to mitigate risks.”

That includes identifying and verifying the identity of users, monitoring transactions, and requesting for more information about senders and receivers.

The bill states that it does not apply to firms providing hardware or software, as long as they don’t have control of the wallet.

That means that self-custody wallets that have no control over the assets in the wallet, like MetaMask, are out of scope.

In past versions of the bill, the regulation set restrictions on transfers used from self-hosted wallets for commercial payments.

Anonymous accounts and privacy coins

Tools that enhance anonymity are a no-no for EU lawmakers. That includes anonymous accounts on CASPs, a rule that also applies to financial institutions like banks.

Crypto assets that enhance anonymity, like Monero and Zcash, will also be banned under the regulation.

Crypto service providers will not be allowed to offer crypto mixing services that obfuscate transaction history.

Transfer of Funds Regulation

The crypto industry also has its own specific money-laundering provisions, contained in the Travel Rule, or Transfer of Funds Regulation.

This law will go live at the end of 2024, and compels CASPs to identify the senders and receivers of crypto transactions.

This crypto-specific rulebook already states that for transactions bigger than €1,000 involving non-custodial wallets, CASPs will need to make sure they know who controls those wallets.

Over the course of negotiations on the anti-money laundering rulebook, lobbyists successfully fought to prevent the AMLR from adding additional onerous provisions that didn’t line up with the Travel Rule.

Reach out to the author at inbar@dlnews.com.