People Are Freaking Out Over an Anonymous Crypto Wallet 'Ban'. Should They?

Today, the European Commission proposed an anti-money laundering (AML) legislation package that aims to slow the flow of criminal money through the European Union financial system. It’s a large package with a few major proposals in the mix, but one in particular spread like wildfire across social media in a collective freak out: a proposed ban on anonymous cryptocurrency wallets. 

Mairead McGuinness, the Commissioner for Financial Services, Financial Stability, and Capital Markets Union, put it bluntly on Twitter, stating, “We will ban anonymous crypto wallets and make sure that crypto-asset transfers are traceable.” This was understood by many as an attempted ban on the kind of digital addresses that any individual can create themselves without the use of an intermediary, with some users posting that such a ban would be effectively impossible to enforce.

However, the proposal states that it is aimed at expanding enforcement of current AML and Countering Financing of Terrorism (CFT) rules to all cryptocurrency “service providers,” for example exchanges and other related platforms that would now be required to collect information on customers if they don’t already.

Being able to hold and send funds anonymously (or pseudonymously) without centralized oversight is one of the biggest appeals of using cryptocurrency. However, it’s also why some governments—notably China with its recently renewed crackdown—see decentralized payments systems as a threat. With ransomware causing havoc, politicians in the US are also putting cryptocurrency in the crosshairs. Today’s announcement sounds like a big deal for cryptocurrency users in the EU, but is it really?

The decentralized nature of the blockchain technology behind Bitcoin, Ethereum, and other top cryptocurrencies means that it is not controlled by any single organization, government, or faction. It’s managed by a distributed ledger spread across potentially thousands of user-hosted nodes, plus it’s immutable (or not easily changeable) by design. Anyone can create their own digital wallet and take custody of cryptocurrency, and transact with other users via direct peer-to-peer transactions or via a decentralized exchange like Uniswap.

However, today’s proposed legislation appears to target a different kind of cryptocurrency wallet: a hosted, or custodial, wallet. This is the kind of wallet that is created for users of centralized exchanges like Coinbase and Binance. With an exchange like that, users must provide identifying information to satisfy know-your-customer (KYC) regulations and create an account, and then the exchange hosts the wallet on your behalf. The exchange is ultimately in control of the wallet, not the user, but such services are an easy way to swap traditional fiat currency for cryptocurrency.

“Over the course of cryptocurrency's existence, we've generally arrived at a sensible settlement with AML/KYC regulators,” Neeraj Agrawal, Director of Communications at U.S. crypto think tank Coin Center, explained to Motherboard. “Custodians like exchanges, brokers, hosted wallets, etc. fall under the same financial surveillance regime as any other financial institution. These businesses are the touchpoint for regulators.”

The European Commission’s proposal “explicitly” refers to these custodial wallet providers, Agrawal said, and would prohibit them from providing anonymous accounts or hosted wallets to users. Self-hosted wallets and non-custodial wallets controlled by users would not be affected by the draft legislation as it’s written today, Agrawal said. And seemingly, the legislation could not affect such self-hosted wallets, due to their decentralized nature. However, it could make using cryptocurrency on-ramps and off-ramps—that is, services that connect crypto exchanges and services to bank accounts and fiat currency—more difficult for users who wish to remain anonymous.

Cryptocurrency publication The Block notes that the draft legislation would expand the Financial Action Task Force’s “travel rule” to cryptocurrency transactions performed at exchanges and related services, or so-called “virtual asset service providers” (VASPs). It would require such providers to log sender and recipient information on crypto transactions of $1,000 or more, and allow for that information to be shared between firms to better trace potential money laundering or wrongdoing.

During a press conference today, Commissioner McGuinness referred to cryptocurrency as “now common currency, if you’d like, but they’re anonymous,” and suggested that crypto services oversight need to be expanded and brought in line with the rest of the financial industry. “We shouldn’t have different rules for the financial system. They should apply across digital currencies, as well,” she said.

Beyond the crypto reporting changes, the EU seeks to create a new AML authority for all EU countries to help ensure that such rules are consistently enforced. A single rulebook will be created to enable such enforcement across the EU, plus the Commission wants to put a €10,000 limit on cash payments. Ultimately, the proposals will face the European Parliament and Council, with an eye to launch the new AML authority by 2024.