Digital currency industry melts down ahead of key EU vote on non-custodial wallets

The European Union will vote on modifying the Transfer of Funds Regulation today, March 31, 2022. How the vote will go remains to be seen, but it’s clear that the language of the draft has caused concern across the digital currency industry.

The EU Parliament votes on Thursday, March 31 on modifying the Transfer of Funds Regulation. Their latest draft could significantly violate individual financial freedom, irreparably harm the cryptoeconomy, & stifle the future of innovation across the EU.

— Faryar Shirzad 🛡️ (@faryarshirzad) March 27, 2022

As usual, industry pundits and personalities took to social media to decry the wording on the draft text. Coinbase even chipped in with an obligatory blog post claiming the new rules would stifle financial innovation and progress. The usual suspects complained about financial freedom, privacy, and how digital currencies aren’t really used for illicit purposes. None of it changed anything, and the EU will hold the vote regardless.

So what is it about the draft text that has the industry so gravely concerned? Let’s dig in and see what is being proposed.

What the new EU rules would mean for digital currencies

It’s the second time in a month that potential EU rules and regulations have spooked the digital currency industry. Not long ago, the block proposed a proof of work (PoW) ban that was ultimately struck down. Now, it is proposing that unhosted wallets should be obliged to collect information about wallet owners and should potentially reject and report suspicious transactions.

The new rules, if passed, would apply to ‘unhosted wallets,’ those being non-custodial third-party wallets such as Ledger, Tezos, and MetaMask. These are some of the most popular wallets with users in today’s digital currency industry, with tens of millions of users worldwide.

The text of the proposed rule change reads:

​​“In the case of a transfer of crypto-assets from or to a crypto-asset wallet not held by a third party, known as an ‘unhosted wallet,’ the crypto-asset service provider or other obliged entity should obtain and retain the required originator and beneficiary information from their customer, whether originator or beneficiary.”

As well as collecting user information, unhosted wallet providers will potentially have to report suspicious transactions and activities to financial intelligence units within the EU. Service providers may even have to reject or suspend transactions that a risk analysis deems suspicious.

Those of a libertarian persuasion will undoubtedly sympathize with some of the concerns expressed about this, but the EU doesn’t see it the same way, and it makes the rules. This gap between ideology and the reality of how governments will act has been a consistent theme in the digital currency industry so far.

If the vote goes through, this will radically alter how digital currency transfers work in the EU. It will undoubtedly place huge burdens on unhosted wallet providers, but then again, the EU doesn’t care about that. It only cares about its objectives as a political entity, and it’s notoriously tough on financial crimes, money laundering, and tax evasion. The EU was never going to let Bitcoin and other digital currencies run free, given the way they have been portrayed for the last several years and given the widespread anti-government and anti-law sentiment within the industry.

This was always coming, and it’s going to happen everywhere

Slowly but surely, people are beginning to realize that Bitcoin can not subvert governments and allow people to do whatever they like without consequences. That narrative led to disasters like the Silk Road and extremist anarchists like Cøbra touting Bitcoin as a tool to bring in the sort of chaos they wanted to see in the world. However, Bitcoin isn’t suitable for any of that, and its success entirely depends on being legally compliant.

As we see, powerful governments can use the law to force their will on the industry. We saw in Ottawa how lawmakers could freeze wallets with millions worth of BTC in them with the stroke of a pen. We’re seeing how even the idea that the EU could require unhosted wallets to be linked to identity is causing mass panic across the industry. 

What happened to the narrative that Bitcoin could withstand all of this, and governments were rendered powerless when faced with it? This was a lie all along, and big companies like Coinbase, Binance, and others with teams of lawyers and advisors have always known it. They are profit-seeking entities, and they will always comply with whatever regulations they are required to, or they’ll be banned from large markets like the EU, U.S., and others.

Everything is changing before our eyes in the digital currency industry. With bans on anonymous transactions well underway, the U.S. SEC circling the likes of Ripple and Tether, and Satoshi’s Bitcoin slowly being understood as an electronic cash system designed for small casual payments that works within the law and which is always subject to it, things are ever so slowly changing for the better. If the EU votes to pass the new rules, it will be another nail in the coffin for the false narrative plaguing the industry.

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