In recent days, there has been a lot of news circulating about an alleged EU ban on crypto wallets.
The key point of that news was the ban on anonymous transactions among citizens residing in the European Union, but the issue actually turned out to be more complex.
Summary
The news of the ban on crypto wallets in the EU
It all started with a tweet from Patrick Breyer.
Breyer stated that a committee of the EU had approved a ban on anonymous crypto payments on hosted wallets.
In a post on his personal blog, he then explained that the relevant committees of the European Parliament had approved new anti-money laundering laws that concerned both cash payments above a certain threshold and those in cryptocurrencies.
Breyer is a member of the European Parliament, elected in 2019 in Germany with the European Pirate Party, and does not belong to the current majority.
In his post, however, he specified that the new rules only applied to crypto wallets managed by providers (i.e. custodial wallets, in this case hosted), and that they concerned transactions of any amount, without a minimum threshold.
The problem is that many have mistakenly interpreted the news as also related to non-custodial wallets, i.e. those owned by users themselves (also known as self-hosted) used for self-custody and for P2P transactions without intermediaries.
The real prohibition
Instead, the EU ban will only concern transactions involving the involvement of a third party.
It is not therefore a ban on P2P crypto transactions, also because it would be technically impossible to prevent them.
To be honest, the issue being limited to transactions through intermediaries was already known for at least a year, when the European Parliament itself published on its official website a press release regarding the new rules on the traceability of crypto transfers.
The confusion was probably generated by a sentence in that statement, which says:
“The rules will also cover transactions, exceeding 1,000 euros, from so-called ‘self-hosted wallets’, when they interact with wallets managed by crypto-asset service platforms.”
However, this sentence in the official statement of the European Parliament was followed by another very explicit one:
“The rules will not apply to transfers from person to person made without the intervention of a provider or those between providers, if they act on a personal basis”.
In fact, even Breyer specifically referred to hosted wallets, but since the official press release also mentioned self-hosted wallets, someone must have been confused.
I self-hosted wallet
In the crypto world, self-hosted wallets are actually called non-custodial wallets, but in fact they are the same thing.
Non-custodial wallets have the peculiarity of being fully and exclusively owned by users, and do not require the intervention of any third party to function.
These are anonymous wallets, or more precisely, wallets that are not identified with the user’s name, but only with a random alphanumeric code.
So it is absolutely impossible to prevent their use, even if anonymous, so much so that for example in China for years transactions in cryptocurrency to and from exchanges have been banned but without success (Chinese citizens have continued to make them).
The intermediaries
The heart of the matter is not the difference between using a non-custodial wallet or a hosted one, but the use of intermediaries.
If infected on one side it is impossible to prevent direct P2P transactions between non-custodial wallets, it is instead possible to intervene on any intermediaries.
In the EU, crypto intermediaries, such as exchanges, need to register with public registries in order to operate in compliance with the law, and therefore are monitored by law enforcement, government agencies, and the judiciary.
The new regulations require intermediaries to verify the identity of all their users, regardless of the amounts transacted, but also to effectively verify the ownership of the non-custodial wallets they interact with.
If they are unable to identify the identity of the owner of a non-custodial wallet, they may not be able to interact with it, even if the interaction is requested by the users themselves.
So all the so-called CASP (Crypto-Asset Service Providers) will have the obligation to verify the ownership of all non-custodial wallets they interact with, both their own and their users’, and to verify the identity of the owner, regardless of the transaction amounts (i.e. without a minimum threshold).
EU: The new rules for crypto wallets
It must also be added that these rules have not yet been finally approved, even though the approval of the majority in the committee implies a high possibility that they will also be approved by the Parliament itself.
Furthermore, they will not come into effect immediately, so it seems that exchanges will be given two or three years to comply.
Actually, it seems that there are already some exchanges that have long been identifying the ownership of all the wallets they interact with, even those that are non-custodial, so it doesn’t seem that the new measures can really create technical difficulties for exchanges.
On the other hand, users who may suffer consequences are those who send or receive funds of uncertain origin using CASPs as intermediaries.
This cascade effect could somehow also damage the CASP themselves, as it could reduce their trading volumes and the funds coming into their platforms.
