What the EU Parliament’s proposed amendments to the AML legislation mean for Unhosted Wallets

The European Parliament is moving to amend the anti-money laundering (AML) legislation which will require crypto exchanges to disclose information about their customers’ anonymous transactions. The new amendment seeks to bring unhosted digital wallets within the AML’s regulatory purview.

An unhosted wallet is one that does not fall under the framework of the Financial Action Task Force (FATF) as a licensed virtual asset service provider (VASP). MetaMask is one example.

The new amendments will also oblige financial institutions to also include information about recipients who are not customers of a particular VASP, in the details of their transactions.

Amendment 124 Section 29(a) of the draft states:

“In cases of a transfer of crypto-assets made from a distributed ledger address not linked to a crypto-asset service provider, known as an ‘unhosted wallet,’ the crypto-asset service provider of the beneficiary should have to obtain information from the beneficiary both on the originator and the beneficiary.” 

As reported by Blockworks.co, the amendment would be voted on, not later than 31st March, 2022. 

Meanwhile, reactions from industry experts to the proposed amendments suggest that it is a threat to the development of technological innovations. 

The Chief Legal Officer of Coinbase, Paul Grewal, maintained that,

“[a]mong the worst of the proposed provisions are new obligations on exchanges to collect, verify and report information on non-customers using self-hosted wallets…one provision requires exchanges to not only collect personal data about wallet users who are not their customers, but to also verify the data’s accuracy before allowing a transfer to one of their customers.”

“If adopted, this revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets,” Grewal further explained.

The European Union (EU) however, contrary to Grewal’s position, has insisted that the purpose of the amendment is to “ensure crypto-assets from potentially dodgy sources do not enter the regulated financial system.”

Patrick Hansen, Head of Growth of DeFi wallet, Unstoppable Finance, believes the EU’s proposed measures are a way of limiting the usage of unhosted wallets.

“For every crypto-transfer from an unhosted wallet over 1k EUR, companies are obliged to inform the ‘competent AML authorities’. For ALL these transactions, even if there is no sign/suspicion of money laundering. This is an absolute violation of privacy rights. The consequence of this…is that most crypto companies won’t be able or willing to transact with unhosted wallets anymore in order to stay compliant,” said Hansen.

Given the different positions between the regulator and industry experts, one pertinent question remains: Do unhosted wallets pose serious security threats which make them unsafe for transactions to the extent that these threats over their legitimate use if the proposed AML requirement is not introduced? Whatever may be the correct position, the fact remains that technology keeps advancing and it is this that regulators would have to catch up with.

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