The EU Parliament recently voted 58 to 52 to strip the anonymity of certain cryptocurrency transactions in its latest attempt to clamp down on non-identifiable crypto usage. The vote to revise the proposed Transfer of Funds Regulation (TFR) bill, which requires confirmation through a vote in a third session later this month, would amend the EU Commission’s anti-money laundering (AML) rules to mean that any user of a private, non-custodial cryptocurrency wallet that sends funds to or receives funds from a cryptocurrency exchange will have to prove their identity before the transaction can take place. Such a rule raises a plethora of practical issues, not to mention opening a can of privacy and safety concerns.
With countries around the world discussing central bank digital currencies (CBDCs), what does the EU’s attitude towards private cryptocurrency transactions tell us about the design of these supposed cash replacements?
EU Parliament Takes FATF Travel Rule Too Far
The genesis for the EU’s harsh new proposals on crypto transactions can be found in 2018 when the G20 group of nations announced that it was looking seriously into cryptocurrency regulation for the first time, with French Finance Minister Bruno Le Maire saying that the group would “regulate crypto-assets for anti-money laundering and countering the financing of terrorism in line with FATF (Financial Action Task Force) standards and…will consider other responses as needed.”
In 2019 the FATF issued guidance that it wanted all its member nations to follow with regard to cryptocurrencies, which included extending its Travel Rule to include digital assets. This meant cryptocurrency exchanges would have to collect the personal data of all individuals transacting over $/€/£1,000 in cryptocurrency, even if the other party wasn’t a user of their platform.
This was deemed to be intrusive enough, not to mention being a huge privacy concern, with some countries, most notably The Netherlands, enforcing the ruling almost immediately. However, the amendment to the Travel Rule was not widely adopted within the EU, leading to more pressure on countries to do something about private cryptocurrency transactions.
Last month’s vote would have effectively set the Travel Rule amendments in stone, but a last minute change in the proposal days before the vote tightened the rules even further to enforce not just collection of said details but verification of them before a customer could send or receive their funds from a third party. This means that, should it be formally voted through, any entity handling cryptocurrencies will have to verify the identity of users interacting with the platform, even though they may not even be customers. They will then have to hold this information on file and hand it over to authorities if requested to.
How this rule change will play out on a practical basis is simply unknown at this point, but it would see exchanges swamped with demands that are not placed on traditional banks. Then there is that concern that a stockpile of names, addresses, and phone numbers all logged with the cryptocurrency addresses belonging to those individuals would be a honeypot for hackers, who would be able to target wealthy individuals with minimal effort.
Increased Oversight Bodes Ill for CBDCs
This dramatic shift in oversight is a worrying development as far as CBDCs are concerned. CBDCs are digital versions of existing fiat currencies that are being discussed by governments and central banks across the world as a potential long term replacement for cash. While some countries, such as the US and the UK, are only in the early stages of CBDC research, others such as China are already undergoing public, real world trials.
Just like regular currencies, CBDCs will be issued by the central bank of each country, who will have the ability to give money out directly to individuals into their personal wallets, which will of course be tied to an individual’s identity and citizenship in that country. This is, in essence, what the EU parliament is trying to do with its rule change on private wallets - to make sure that every wallet on the blockchain is tied to the identity of a real person. This means, too, that the governments overseeing those central banks will be able to keep a much closer eye on the actions of CBDC holders.
Taking this theory forward, it is not hard to imagine a world where physical cash is entirely replaced by CBDCs, and why governments would cheer it - there could be no financial foul play, because every penny in the world would be accounted for and linked to a real person at all times.
This is the reason China is so in love with the idea of a CBDC, and indeed the reason why the country began its initial research into one in 2016. Replacing cash with a digital yuan affords the ruling powers the chance to observe at even the minutest level the spending of each citizen in the country. If the government takes a dislike to a certain type of good or service, as it has done with cryptocurrencies, it can ban shops, chains, or even entire sectors of commerce from being able to interact with users on the digital yuan blockchain.
This level of control will not be matched across the world of course, but there is no doubt that certain governments are pushing ahead with the implementation of such systems for the express purpose of ensuring that its citizens are not doing things with their money that the state doesn’t approve of. And don’t forget, if the state is giving you your money, it can take it away from you just as easily if it suspects you of wrongdoing.
Bitcoin = Freedom
All of which brings to Bitcoin. The beauty of Bitcoin is that, as long as it is stored in a private, non-custodial wallet, it cannot be easily taken from you - even by the EU. No one can prevent you from spending your bitcoin on whatever you like, so long as it is legal. Bitcoin is infinitely better for the privacy of the individual than even the most loosely regulated CBDC, and indeed shares more of a resemblance to a genuine digital cash than the actual digital cash systems that central banks will eventually impose to replace physical pounds, dollars, and euros.
Anyone who wants the cryptocurrency sector to reach the lofty heights of adoption that its supporters believe it can, knows in their heart that regulation is vital. With only 5% of the world understanding and using cryptocurrency its potential is capped, and the other 95% won’t be convinced until it is safe to set foot in the world of digital assets, and for this we need regulation.
However, there is the very real danger, as we are seeing in countries like China, that regulation can morph into authoritarianism. The risks associated with the new EU regulations on anonymous transfers are not on the same scale as this, but there is a danger that the attempt to make physical cash more convenient will end with a system that provides its users with less privacy as a result.
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