Why the EU regulation of unhosted wallets can’t work

Maybe you’ve heard about it already. European decision makers are taking big steps to regulate the decentralized finance sector in the EU. The latest developments are bad news, and it affects you too.

The situation in a nutshell

The situation in a nutshell Recently the EU has begun the process to regulate Web3.0, including transactions and so called ‘unhosted wallets’ via the Transfer of Funds Regulation (TFR). We believe the proposed regulatory path will negatively impact the citizens and businesses of the EU. That’s why Blockpit officially supports the open letter of Unstoppable Finance, along with many other well-known crypto initiatives and players.

The proposed TFR content has potential and far-reaching implications for EU institutions and individuals by introducing unbearable bureaucratic procedures to Crypto Asset Service Providers (CASPs) in a hyper growth emerging economy.

The good news is you can still do something, but time is running out. The next voting takes place on April 28. Show the political representatives that you do not agree with such far-reaching regulation and sign the open letter.

Ok, you now know roughly what the regulation and consequences of it are. But is it really that dramatic? Unfortunately yes. Let’s look at the matter in detail.

What is the new regulation about?

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) supported the proposed draft of a new Transfer of Funds Regulation (TFR). The intent of the new rules is to stop illicit flows of crypto assets in the EU. Among other provisions, the TFR obliges crypto service providers to apply stringent anti-money laundering measures in regards to cryptocurrency transactions, including those to and from ‘unhosted’ wallets. Under the TFR, all crypto transfers will have to include information identifying the source of the assets and the recipient.

What are hosted / unhosted wallets?

Unhosted (non-custodial) wallets are the equivalent of a wallet in the real world. Users take real ownership and control of their assets. Popular examples include browser-extentions (e.g. Metamask) and hardwaer wallets (e.g. Ledger). Unhosted wallets are the cornerstone of transactions in the DeFi space.

Why should I care?

The regulation will have unintended and devastating effects that will negatively impact EU citizens and businesses. Citizens’ privacy and security rights would be violated by the regulation as it stands. European crypto businesses will suffer an economic disadvantage compared to their international peers, putting Europe as a crypto destination under threat. A major consequence could be an unprecedented brain drain from Europe.

What will be the effects of this regulation?

  1. The regulation will limit opportunities for open innovation, privacy and financial freedom. It will weaken the EU’s role on the world stage.
  2. The widespread adoption of NFTs could mean in the near future almost every business and individual could be considered a CASP (crypto asset service provider). This would involve a huge regulatory effort.
  3. Privacy and security for EU citizens will be violated by public disclosure of all transactions. Another step towards a transparent citizen.
  4. Transactions between a CASP and a non-CASP (unhosted wallet) will be subject to the travel rule. This is unlawful. Rather these transactions should be treated as a cash transaction.
  5. Crypto funds and users holding crypto will be treated differently from fiat. Every crypto transaction – and not just those with a EUR 1,000 minimum threshold as is the case with fiat transactions will be “travel rule eligible.”

Why are the concerns of EU parliamentarians unfounded and sometimes even misguided?

  1. The threat of crypto enabled financial crime is dramatically overestimated. Current financial surveillance regulations are sufficient. Look at the numbers: 2021: Crypto transactions involving illicit addresses 0.15% 2021: Fiat transactions linked to crime 2-5%
  2. The security and fraud concerns addressed by the EU parliament miss the point. While there have been security breaches in centralised exchange platforms (e.g. Mt. Gox or Bitfinex), they are not related to a failure of the actual ledger. Even more so, the security of blockchains is high because a publicly accessible and transparent ledger makes a weak tool for obfuscation and money laundering. Still, better security and auditing standards for protocols are needed.
  3. Crypto has come to stay and continues to disrupt the industry. From the start of BTC more than 10 years ago to DeFi gaining traction in 2020 and growing to more than 250bn value held in DeFi. The EU should see this as an opportunity to drive innovation and not to overregulate.

Let’s take action now

Crypto technology brought a massive wave of disruptive innovations that introduce paradigm shifts. This is a challenge for regulators. We believe in education and understanding to alleviate stress caused by disruptive progress. Thus, we support the open letter initiated by Unstoppable Finance to the EU regulators and we stand for a progressive regulatory approach to emerging crypto technology.

Do you also support open innovation, privacy and financial freedom?

Then we ask you to sign the open letter now and tell your friends about it. The next voting takes place on April 28. Time is of essence.

Sign the open letter



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Disclaimer: The information provided in this blog post is for general information purposes only. The information was completed to the best of our knowledge and does not claim either correctness or accuracy. For detailed information on crypto regulations, we recommend contacting a certified legal advisor in the respective country. If any questions occur, feel free to contact us on our social media channels.

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