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EU Lawmakers Back Regulation Threatening Defi Space, Unhosted Crypto Wallets

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Apr 4, 2022

Controversial legislation has been approved by members of the European Parliament that could see the decentralized finance (Defi) space undermined in the European Union. While a few of the provisions have not yet been coordinated with other institutions in Europe, they are aimed at introducing restrictions on transactions that are pertaining to privately managed crypto wallets. On Thursday, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament showed its support for the Transfer of Funds Regulation (TFR). As per the requirements, crypto service providers facilitating crypto transactions would need to apply stringent anti-money laundering measures, including those made to and from ‘unhosted’ wallets.

The text received the support of majority of the ECON members, as the regulation requires crypto platforms to share, verify and keep transaction data with financial authorities. These procedures are applicable to transfers that are valued at EUR 1,000 and above. According to a press release, threshold-based rules are often circumvented by crypto transactions due to which the MEPs had decided to remove exemptions and minimum thresholds for low-value transfers. The TFR states that all crypto transfers would have to provide information for identifying the source as well as the recipient.

The draft’s authors would want to ensure that it is possible to trace and block all transactions that they consider suspicious. However, the Parliament’s press service did note that person-to-person transfers would not have to follow the rules if they are conducted without a provider, such as providers who are acting on their own behalf, or in the case of bitcoin trading platforms. In addition, those who process crypto transactions would also have the ability of stopping transfers that originate from and are made to providers who are non-compliant. This is in accordance with another provision that also received support.

The Civil Liberties, Justice and Home Affairs (LIBE) Committee also passed this regulation. As per the official announcement, the aim of the new rules is to prevent illicit flows in the European Union. The lawmakers stated that in order to ensure crypto-asset transfers are not used in terrorist financing, money laundering and other criminal activities, it would be necessary to trace and identify them. If the draft remains unchallenged, it would move onto the trilogue stage, which is considered the next step in the legislative process of the European Union. This is when the Council of the European Union and the European Commission also have to agree to the draft.

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The Markets in Crypto Assets (MiCA) framework proposal is also under discussion by the institutions, which also had its own piece of controversial text that could have prohibited proof-of-work cryptocurrencies, such as Bitcoin. Similar to this text, the TFR also saw negative reactions from the European crypto community. Unstoppable Finance’s co-founder, Peter Grosskopfsaid that the requirement for verification of unhosted wallets would be a serious invasion of privacy and the defi ecosystem in Europe would also suffer. Industry watchers believe that the purpose of the regulation is to restrict the defi sector and ban unhosted wallets in Europe.

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