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Crypto: Amendment to crack down on unhosted crypto wallets passed

Proposals D and E, as well as the entire amendment to crack down on unhosted wallets, were adopted by the committee in the European Parliament.

On Thursday, March 31, 2022, the amendment cited in this Coin Academy article was finally passed in committee in the European Parliament, allowing this new money transfer regulation to gain momentum and move closer to final implementation.

Proposals D and E of the TFR (Transfer of Funds Regulation) were adopted with 58 in favor to 52 against and 62 in favor to 51 against respectively before the whole project was adopted later in the day.

The next few months will be spent trying to make changes to the current proposals before the amendment officially becomes law and is put into practice.

If the text were to remain as it is, then crypto currencies would be officially regulated much more heavily than fiat currencies in Europe. Let’s go over the important points about the FFT.

The FFT was first applied to traditional payment systems in 2015, before being expanded to cover crypto currency transfers as well. This is the European Union’s implementation of the Financial Action Task Force’s (FATF) “Travel Rule.” However, the TFR goes far beyond the FATF recommendations, for reasons and based on sources that are still unclear.

There are several problems with these proposals, even for every honest citizen with nothing to worry about:

  • For every crypto currency transfer involving a “non-hosted” wallet (a wallet that the user alone controls such as MetaMask or Ledger), the TFR requires centralized platforms to collect personal information about the sender as well as the recipient. The TFR also requires the platform to verify the accuracy of the information collected and report this information to European and national anti-money laundering authorities. This reporting would be done upon request or automatically when the value of the transaction exceeds €1,000
  • This measure, which is extremely difficult and costly to implement, would simply force exchanges to refuse fund transfers to unhosted wallets
  • This poses a huge security problem for users who would have great difficulty securing their funds on hardware wallets like Ledger, even if they agreed to verify their information
  • In case these verifications and disclosures are implemented by the exchanges, another problem is the security of the information within the platform itself: the personal information of the owners of unhosted wallets is a goldmine for hackers and professional phishing attackers. These ill-intentioned people could be encouraged to attack the exchanges in order to get hold of the users’ personal information

As you can see, this is not just a simple amendment that could pose a problem for terrorists and people wishing to launder their money using the blockchain. These liberticidal measures concern all users and put their security at risk.

Decentralized finance can not be stopped, this kind of proposals will not allow the protection of the consumer as promised. The latter will be able to use backdoor means to reach the use of unhosted wallets, instead of a classical, regulated and secured way through centralized platforms.

The implementation of some of the proposed measures seems to be much more complicated than its adherents imagine. A simple example is cold wallet type wallets like Ledger or Trezor which do not require any KYC at the moment. Sending funds from such a wallet to a centralized exchange should be subject to identity verification even though the wallet sending the funds does not have the information.

No proposal to simplify these mechanisms has been made yet, leaving the feeling that it will be up to the crypto companies to adapt to these changes without it being possible.

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