Could the EU stifle innovation through over-regulation of crypto?

Just weeks ago the crypto industry breathed a sigh of relief when the EU voted against a provision that would have effectively banned, or at the very least restricted, the trading of proof-of-work cryptocurrencies in the European Union.

However, this week the EU voted in favor of extending the Transfer of Funds Regulation (TFR) to cryptocurrencies. If these proposals are passed, it will mean that all cryptocurrency transfers will have to include information identifying the recipient.

More controversially, while this rule applies only to traditional payments in excess of 1,000 EUR, it will apply to crypto payments of any amount. Additionally, self-hosted wallets (what the EU refers to as “unhosted wallets”) would also be captured by the rule. This means that rules governing crypto transfers would be stricter than those governing the transfer of fiat currencies.

What is the EU’s motivation for this?

According to the European Union:

“The anonymity associated with crypto assets, as well as their speed and global reach bring obvious risks of their being used for criminal purposes, especially cybercrime…

Europol’s Internet Organised Crime Threat Assessment states that cryptocurrencies have become the default payment method for victim-to-criminal payments in ransomware, as well as criminal-to-criminal payments on the Darkweb.

The Commission’s AML Package provides for the Revision of the 2015 Regulation on Transfers of Funds. The revised Regulation will extend the obligation of payment service providers to accompany transfers of funds with information on the payer and payee to crypto assets, giving effect to the Financial Action Taskforce (FATF)’s recommendation 16 on wire transfers and Recommendation 15 on virtual assets.”

Essentially proponents of the legislation believe that it would make it easier to identify and report suspicious transactions, freeze digital assets and deter money laundering and financial crime.

Industry Reaction

The industry reaction to the vote has been very negative. Many in the industry view the proposed application of TFR rules as detrimental to crypto and web 3.0 innovation in Europe.

Blockchain for Europe

In a press release on Thursday, Blockchain for Europe condemned the vote, saying that they regretted the decision to introduce “impractical verification requirements for transfers to and from unhosted wallets”. They went on to say that the EU’s decision will send a signal to innovators around the world that “Europe is not a place for innovation and, therefore, not a market worth investing resources in“.

Overall, this will lead to insufficient consumer protection, huge privacy concerns, a reduction of Europe’s competitiveness and a missed opportunity for better law enforcement at European level.

Blockchain for Europe

Ledger

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Pascal Gauthier, CEO of cold storage wallet Ledger said that “the EU has chosen fear over freedom. EU representatives are missing that this digital shift has the potential to create thousands of jobs and a vibrant industry on European soil.”

Seth Hertlein, Head of Public Policy at Ledger, also pushed back against the claims that cryptocurrencies represent a significant AML threat. In doing so, he quoted statistics by Chainalysis which show money laundering accounted for 0.05% of all cryptocurrency transaction volume in 2021, while the amount laundered through fiat currency is estimated by the UN to amount to 5% of global GDP.

Cake DeFi

While Julian Hosp, CEO of Cake Defi, believes that the vote will be mostly “non-event” for crypto investors, he did echo the sentiments of Blockchain for Europe and Ledger that it would have a detrimental impact on innovation in Europe.

The EU once again passes the innovation baton to the US and ASIA. Which is why I left that place – vote with your feet!

Julian Hosp, CEO of Cake Defi

What’s your view on the proposed extension of the Transfer of Funds Regulations to crypto? Will it have a detrimental impact on innovation in Europe?