The European Parliament has passed an amendment in committee that aims to heavily monitor transfers to self-hosted (non-custodial) wallets. While there are still a few steps to go before a final adoption of the measure, it’s one more step towards a tightening of the conditions of existence of crypto companies. We take a look at the risks, and the next steps to come.
European Parliament moves towards strong oversight of self-hosted wallets
As a reminder, self-hosted wallets are those that do not rely on a centralized entity to hold cryptocurrencies. This category includes hardware wallets, such as those offered by Ledger, as well as all those where the user holds his own private key.
These wallets are logically little monitored, unlike a wallet offered by an exchange platform. This is not to the liking of some European legislators, who want to have a look at the crypto-currencies that pass through these means.
Earlier this week, we told you that the ECON Committee was planning to vote on an amendment on this subject. It included two strong measures:
- The collection of information on cryptocurrency transfers by regulated services, regardless of the amount
- Oversight of self-hosted wallets, with regulated platforms obliged to collect information on the nature of transfers and the holders of funds
Contrary to what we have read here and there, this is not a ban on self-hosted wallets, but in fact it would make the work of companies extremely complicated. This of course raises questions of feasibility: how can such transactions be monitored on a large scale? And above all, why would the EU give itself the right to monitor digital wallets so closely, when it does not do so for other types of transactions?
Surveillance of cryptocurrencies planned
The vote was validated yesterday in committee, so this is a first step towards more supervision. As we know, cryptocurrencies are generally already traceable, with transactions recorded in often public registers. This type of measure would therefore be a considerable brake on the fluidity of transfers, and poses major logistical problems.
The hope for the ecosystem is that this vote is by no means final. The amendment needs to be examined and discussed by several EU bodies. The proposal will be put on the table again in mid-April, with a discussion including the European Parliament, the European Commission and the Council of Europe.
This phase is expected to take a few weeks, and will allow changes to be made to the proposal. So nothing is set in stone yet, but the vote showed a willingness to move in the direction of monitoring:
2/ Very thin margins.
Compromise D: 58 yes | 52 no | 7 abstentions
Compromise E: 62|51|5It seems like a majority of (most) MEPs from S&D, GUE, Greens & Renew voted in favor, while a minority of (most) MEPs from EPP & ID voted against. ECR seems more split (tbd).
— Patrick Hansen (@paddi_hansen) March 31, 2022
So it will all come down to the next few weeks and whether there will be any changes to this project
The cryptocurrency ecosystem in danger
As mentioned above, there are not only ethical issues with this proposal. If validated, it would be such a hindrance for exchange platforms that the smallest ones might well decide to stop allowing transfers to self-hosted wallets. For others, such as Binance or Coinbase, it would drastically increase processing costs:
3/ As this is completely unfeasible, we expect that companies like Coinbase would only allow transfers to unhosted wallets linked to their own customers and verified through a private key signing (which makes these transfers more complicated and costly).
— Unstoppable Finance (@UnstoppableDeFi) March 31, 2022
It also means that identifying information such as cryptocurrency holders’ names, addresses or other sensitive data would be linked to their wallet addresses and their entire transactions on the blockchain.
The crypto industry is currently mobilising to raise concerns about this. The measure is not only contrary to the ideals upheld by the ecosystem, it could have considerable consequences for its long-term development. We will therefore be closely monitoring developments and upcoming key dates that will give us more insight into the future of cryptocurrencies in Europe.
