Experts fear that the proposed measures may stop European exchanges from dealing with unhosted crypto wallets altogether.
Weeks after narrowly avoiding a de facto ban on Bitcoin, Europe is on the brink of enforcing regulations that could cause huge problems for crypto investors.
Unstoppable DeFi's head of strategy Patrick Hansen has warned that the European Parliament's Committee on Economic and Monetary Affairs is planning a crackdown on unhosted wallets — and draft measures reveal "absolute red flags."
As a reminder, unhosted wallets refer to addresses that are controlled by individuals rather than crypto exchanges — effectively, the difference between banknotes in your pocket and the savings in a bank.
European politicians are currently working on anti-money laundering regulations — and one of the measures already proposed would see exchanges become responsible for collecting personal information whenever transfers are made that involve an unhosted wallet.
According to Hansen, one red flag involves a new provision that virtual asset service providers would need to "verify the accuracy" of the information they gather as well — meaning exchanges would have the impossible task of correctly identifying who owns an unhosted wallet. Explaining the ramifications this rule could have, Hansen tweeted:
"The consequence of this, imo, is that most crypto companies won’t be able or willing to transact with unhosted wallets anymore in order to stay compliant."
Another provision would mean that an exchange would have to inform the authorities every time one of their users receives more than €1,000 ($1,096) from an unhosted wallet — even if there is no evidence to suggest that money laundering is taking place. According to Hansen, this amounts to "an absolute violation of privacy rights."
He also flagged another provision that suggests the European Commission will assess the "effectiveness and proportionality" of these new rules in 12 months' time — potentially paving the way for further restrictions against unhosted wallets in the future.
Coinbase's chief policy officer Faryar Shirzad has warned the measures "could significantly violate individual financial freedom, irreparably harm the cryptoeconomy, and stifle the future of innovation across the EU." He wrote:
"For transactions with self-hosted wallets, requiring the widespread collection, record holding, and verification of wallet data is hugely harmful. The verification requirement, in particular, is almost impossible to satisfy, raises serious privacy issues and should be fixed."
Shirzad also urged the European crypto community to help MEPs "understand the impact of what they are proposing," adding:
"The future of EU innovation is at stake and a transformational moment for economic freedom could be wasted. Write your MEP & Tweet @Europarl_EN . They need to hear from you."
Hansen went on to express fears that the proposed measures could mean "every single satoshi transaction that is not purely P2P will have to be accompanied by the sharing of personal information." He described this as a "totally unjustifiable double standard," adding:
"This is a totally unjustifiable double standard. If anything, the AML requirements for cryptocurrency should be lower, since blockchain-based transfers offer new and additional ways to track and monitor."
The EU is especially worried about criminals using cryptocurrencies to transfer ill-gotten gains across borders without revealing their identities.
Hansen warned that the crackdown on unhosted wallets could create "huge data honeypots for hackers" and ultimately make the crypto ecosystem "very close" to SWIFT — with every crypto transaction (except those exclusively between unhosted wallets) being accompanied by the transfer of personal information.
The Economic and Monetary Affairs Committee is set to vote on these provisions on Thursday.