Overview

On March 31, 2022, two European Parliament committees – the Committee on Economic and Monetary Affairs and the Committee on Civil Liberties, Justice and Home Affairs (the “Committees”) – voted in favor of new rules  (the “Rules”) that would change the way cryptocurrency transactions are treated by the European Union (EU) and would require that certain identifying information about transacting parties be recorded. Proponents of the Rules state that their implementation will prevent digital currency from being used for money laundering and other unlawful activities. Critics argue that the Rules raise serious privacy concerns and will chill innovation in the crypto space.

While the information to be collected would not differ materially from information that is already collected and processed under financial rules in the EU (and most jurisdictions), here it appears that entities that facilitate crypto transactions will in some cases be required to collect identifying personal information from noncustomers (e.g., unhosted wallets). It is unclear how EU lawmakers envision that this information will ultimately be collected and therefore to what extent certain provisions of the EU’s General Data Protection Regulation may apply or conflict with the Rules.

Key Points:

• If enacted, the EU Parliament’s proposed Rules would require the collection of certain identifying information of parties transacting in cryptocurrency, in certain cases without regard to the transactions’ value (as compared to anti-money laundering rules that apply to fiat payments over EUR 1,000 (US$1,114)).
• The Rules would apply to all cryptocurrency transactions (other than person-to-person transfers conducted without a provider or among providers acting on their own behalf), not only those to or from wallets operated or controlled by cryptocurrency firms. This would greatly increase the traceability of crypto-assets transferred to or from self-custodied or “unhosted wallets” (wallets with private keys controlled by the individuals to whom the wallets belong) and limit the ways in which unhosted wallet owners could transact anonymously.
• The Committees’ votes indicate a general agreement with positions taken by the EU Ambassadors further to their December 2021 mandate to negotiate with the EU Parliament on a proposal to revise existing rules on fund transfer information collection requirements, specifically to ensure traceability of cryptocurrency transfers.
• According to reports, members of the European Parliament also want the European Banking Authority to create a list of unregulated, or otherwise high-risk, cryptocurrency service providers for the purpose of preventing transfers to providers on that list.
• Advocates of the proposed Rules assert that they will (1) help prevent bad actors from using unhosted wallets to launder funds; (2) discourage high-risk transactions; and (3) make it easier to identify and freeze digital assets related to suspicious transactions, individuals or entities. Additionally, supporters note that applying the Rules to certain cryptocurrency transactions, regardless of the amount, is necessary to avoid circumvention through use of multiple wallets sending numerous small transactions in a process referred to as “smurfing.”
• Critics contend that the Rules will chill innovation in the crypto ecosystem and that requiring identification of unhosted wallet owners raises serious privacy concerns.
• The proposed Rules are similar to a December 2020 rule proposed by the U.S. Financial Crimes Enforcement Network (FinCEN). The FinCEN proposal was met with massive resistance from the U.S. crypto community and has been stagnant ever since. 

Conclusion

Cryptocurrency and privacy advocates are likely to keep a close eye on whether the EU Parliament’s proposed Rules are enacted and what, if any, privacy concerns are addressed by EU lawmakers. Attorneys at BakerHostetler can assist clients concerned about the potential impact these proposed Rules may have on their business and facilitate compliance in the case that the Rules are adopted into law.

The BakerHostetler Blockchain Technologies and Digital Assets team has members across the firm’s core groups, and our attorneys have extensive experience across all sectors of the blockchain and cryptocurrency markets, including investigations, securities law, commodities law, Bank Secrecy Act/Anti-Money Laundering compliance, tax, privacy, transactions, advertising law, intellectual property and technology design as well as government affairs, public policy and advocacy across federal departments, agencies and Congress. Please feel free to contact any of our experienced professionals if you have questions about this alert.