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European Parliament to require identification of transactions with self-custody portfolios

The European Parliament's efforts to regulate cryptocurrencies do not stop in recent weeks. The body is about to vote on a proposal to make it mandatory to identify all transactions with bitcoin and other cryptocurrencies in the Eurozone. According to data posted on Twitter by Patrick Hansen of blockchain firm Unstoppable DeFi, the Parliament's Economic Affairs Committee will vote this March 31 on a package of measures that has been under evaluation since July last year. The plan of parliamentarians with this legislation is to review and reformulate some of the existing regulations to prevent money laundering and terrorist financing (AML/CFT), extending its application to the cryptocurrency ecosystem. 

The aim is to make transactions with bitcoin and other cryptocurrencies traceable and identifiable by obtaining and verifying all user data. All digital asset providers are thus expected to apply the so-called "travel rule," a standard proposed by the FATF (Financial Action Task Force). Among the existing laws that would be reformulated to achieve this goal is the one related to the limits on the amounts of bank transactions that can remain anonymous in the European Union. Currently, the minimum amount is set at 1,000 euros (USD 1099).

"The bloc's national governments have already said they want to remove that lower limit and extend the rules to crypto-assets," the MPs note.

Currently, only specific categories of crypto-asset service providers are included in the scope of EU AML/CFT rules. The proposed reform will extend these rules to the entire cryptocurrency sector, obliging all service providers to conduct due diligence on their customers.

European Commission

The reduction of the minimum amount and the inclusion of the entire cryptocurrency sector is made because large transactions could be split into smaller ones, a practice known as "smurfing ."Also, the measures will include prohibiting exchanges from making or assisting in any transfers that are rated as high risk for money laundering or suspected to be the proceeds of crime.

According to the European Commission, the goal is to make it more challenging to execute transactions between the European Union and countries considered tax-havens.  

Self-custody wallet providers will report user data, but how? 

According to what the publication indicates, most European legislators agree to approve this package of laws and require users' identity data in cryptocurrency payments. This, regardless of the amount of the transaction and the type of platform used. 

This is not only intended to track cryptocurrency transfers in exchanges but also those made in decentralized platforms and those sent or received from self-custody wallets. This decision would pose significant problems for the practical application of the law, considering the technical difficulties in identifying and verifying transactions from non-custodial wallets. In this regard, Hansen expresses that it may be difficult, if not impossible, for cryptocurrency service providers to demonstrate an "unhosted" counterparty.   "Thus, to remain compliant and safeguard their place in the EU market, these companies would be forced to cut off transactions with such wallets," fears Hansen.

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