Recent European Union plans to reduce the energy footprint of proof-of-work technology – which some feared would amount to a bitcoin (BTC) ban – failed to get through the European Parliament. However, a second, equally contentious anti-money laundering measure did pass and may now become law if governments sign on.
Parties facilitating crypto transactions would be required to identify participants under a planned expansion of existing banking measures known as the travel rule. EU legislators want this to extend to all payments, even to the smallest payments or to unhosted wallets, where the asset is held by a private individual rather than a regulated exchange.
Proponents of the travel rule, including lead lawmaker Assita Kanko, have argued that it will help reduce crime and could spur innovation in a sector that values creativity.
“If the banking sector, that the crypto people think is actually boring and old, is surviving the travel rule … why would the very chic, cool crypto people not be able to do so?” she claimed, after the measure was voted through her committee on March 31. “They could work it out. … I guess I’m telling them to try.”
However, in Paris, some argue that the existing rule, which requires institutions like banks to report any suspicious-looking payments to authorities, is ineffective even in the conventional financial sector – and is far less effective when applied to blockchain-style technology.
According to Hedi Navazan, head of compliance for Crystal Blockchain, the rules would require crypto exchange providers to “provide a full report to the authorities… when they see an unhosted wallet is involved, without even considering the threshold.”
That would mean that the financial intelligence units that investigate suspected money laundering cases would be “bombarded” with data known as suspicious activity reports, despite the fact that “they already don’t have the capacity” to process the copious information they now receive from banks.
Site of the Paris Blockchain Week Summit. Source: Getty Images
This is consistent with findings from the United Kingdom’s Law Commission, which complained in June 2019 that “too many low-quality” money laundering reports were sent to the authorities, “undermining the entire process.” Even the European Union’s own regulator, the European Banking Authority, has expressed concern about a “tick-box” mentality in which financial companies just follow procedures rather than detecting dangers.
Additionally, the EU’s approach ignores the fact that transparent blockchains enable payment tracking, Navazan noted, which could result in exchanges abandoning transactions using unhosted wallets entirely.
Yet, some have raised alarm about far worse consequences.
According to Joshua Ellul, director of the University of Malta’s Centre for Distributed Ledger Technology, recent decisions regarding crypto payments were “malinformed.”
Crypto “is definitely used for this [money laundering] activity just like cash is,” Ellul stated in an interview shortly after the European Parliament decision, warning that lawmakers were “rushing to a solution.”
“Stifle it too early, and operators in a space will just move to another area,” he explained.
Others, on the other hand, are more optimistic, warning that regulation is unavoidable – and that responding constructively to it would at the very least silence incumbent banks and others sceptical of crypto newcomers.
The EU’s decision “might hurt the industry in the short term, because if someone doesn’t want to give his wallet information and moves elsewhere, then, yeah, you might suffer,” Michael Amar, co-host of the summit, claimed.
“But in the end, if you want to be mainstream, it needs to be regulated,” he said. “We know that it needs to be kosher … let’s not give the excuse for the people who don’t want to have the industry.”