Earlier this month the Economic and Monetary Affairs Committee agreed draft rules strengthening EU rules against money laundering and terrorist financing. What is your assessment of the proposals?
The legislative proposals do not seem to be well-thought-out. It seems overly onerous for a problem us that is not as large as commonly perceived. Most likely, it has been strengthened and accelerated because of speculation that Russia may utilize cryptocurrencies to avoid, or mitigate, the impact of economic sanctions imposed on it in response to its invasion of Ukraine.
Why do you believe the problem is not as large as commonly perceived?
The perception amongst global policymakers and the public at large is that cryptocurrencies are a safe haven for criminal activity. Such perceptions first arose because of Bitcoin’s adoption by the infamous Silk Road darknet market, which the FBI shut down in 2013. However, that was over eight years ago and the industry has matured since then. Blockchain technology which underpins cryptocurrencies are publicly available meaning every transaction ever conducted is recorded, published and visible to all. This transactional transparency reduces their attractiveness to criminals for the simple reason law enforcement have developed tools to follow even complex transactions on the blockchain and can use this information to go after them. For example, it provided the means for US law enforcement to track down and arrest two people suspected of laundering funds from the 2016 Bitfinex hack, leading to the recovery of over $3.6bn of stolen assets - the single largest recovery of crypto-assets in history.
Recent academic research also supports the view that cryptocurrency usage by criminals is not as large as often presumed. A 2021 paper estimates just 3% of Bitcoin transactions are associated with illegal activity, which is much lower than the previous and widely quoted estimate of 25%. In addition, on-chain metrics companies, who specialize in analysing cryptocurrency blockchains, consider the number of illegal transactions to be less than 1%.
If the regulations are adopted what do you think will be the impact on the crypto-asset ecosystem within the EU?
The crypto-asset ecosystem is expanding rapidly and there is considerable interest from investors worldwide seeking exposure to this new asset class. Understandably, regulators do not wish to be left behind, so legislative proposals are coming thick and fast from many countries. The challenge facing them is to implement legislation that provides the means to adopt these new technologies in a reliable and safe manner but without stifling innovation.
The Financial Action Task Force, an inter-governmental body setting international standards that aim to prevent money laundering and terrorist financing, set a minimum threshold for sharing identifying information about the recipient and receiver for cryptocurrency transactions (so-called travel rules)at $1,000. The UK is proposing similar legislation with a £1,000 threshold. In contrast, the EU proposal sets no minimum thresholds or exemptions for low-value transfers. Such divergence will only serve to make it a less attractive jurisdiction for crypto companies to be located because of the increased administrative burden.
Moreover, one of the most socially beneficial aspects of cryptocurrencies and blockchain technology is the potential to facilitate micropayments. For these transactions to take place the fees associated with them need to be practically zero. By applying travel rules to all transactions, micropayments could become impractical within the region.
The other problematic aspect is their treatment of unhosted wallets. These are crypto wallets held by individuals not exchanges and as such they give users the ability to conduct transactions without providing personally identifiable information. The EU proposals requires technological solutions to ensure asset transfers from unhosted wallets can be individually identified. Even leaving aside the obvious infringement of personal privacy such requirements imply, it is far from obvious that this is even practical to implement. As a result, it will effectively mean that most crypto companies operating within the EU will not conduct transactions with unhosted wallets under the risk of breaching the rules.
Final takeaways?
Overall, the proposed EU legislation seems to be designed to prevent a problem that is nowhere near as large as commonly perceived and in a manner that will only serve to stifle innovation and discourage crypto adoption within the region. If enacted – and here there is still hope for reprieve – the legislation will see the EU lose out to other countries and jurisdictions who are more embracing of this technology and who will therefore be better placed to reap the economic benefits.
The legislative proposals do not seem to be well-thought-out. It seems overly onerous for a problem us that is not as large as commonly perceived. Most likely, it has been strengthened and accelerated because of speculation that Russia may utilize cryptocurrencies to avoid, or mitigate, the impact of economic sanctions imposed on it in response to its invasion of Ukraine.
Why do you believe the problem is not as large as commonly perceived?
The perception amongst global policymakers and the public at large is that cryptocurrencies are a safe haven for criminal activity. Such perceptions first arose because of Bitcoin’s adoption by the infamous Silk Road darknet market, which the FBI shut down in 2013. However, that was over eight years ago and the industry has matured since then. Blockchain technology which underpins cryptocurrencies are publicly available meaning every transaction ever conducted is recorded, published and visible to all. This transactional transparency reduces their attractiveness to criminals for the simple reason law enforcement have developed tools to follow even complex transactions on the blockchain and can use this information to go after them. For example, it provided the means for US law enforcement to track down and arrest two people suspected of laundering funds from the 2016 Bitfinex hack, leading to the recovery of over $3.6bn of stolen assets - the single largest recovery of crypto-assets in history.
Recent academic research also supports the view that cryptocurrency usage by criminals is not as large as often presumed. A 2021 paper estimates just 3% of Bitcoin transactions are associated with illegal activity, which is much lower than the previous and widely quoted estimate of 25%. In addition, on-chain metrics companies, who specialize in analysing cryptocurrency blockchains, consider the number of illegal transactions to be less than 1%.
If the regulations are adopted what do you think will be the impact on the crypto-asset ecosystem within the EU?
The crypto-asset ecosystem is expanding rapidly and there is considerable interest from investors worldwide seeking exposure to this new asset class. Understandably, regulators do not wish to be left behind, so legislative proposals are coming thick and fast from many countries. The challenge facing them is to implement legislation that provides the means to adopt these new technologies in a reliable and safe manner but without stifling innovation.
The Financial Action Task Force, an inter-governmental body setting international standards that aim to prevent money laundering and terrorist financing, set a minimum threshold for sharing identifying information about the recipient and receiver for cryptocurrency transactions (so-called travel rules)at $1,000. The UK is proposing similar legislation with a £1,000 threshold. In contrast, the EU proposal sets no minimum thresholds or exemptions for low-value transfers. Such divergence will only serve to make it a less attractive jurisdiction for crypto companies to be located because of the increased administrative burden.
Moreover, one of the most socially beneficial aspects of cryptocurrencies and blockchain technology is the potential to facilitate micropayments. For these transactions to take place the fees associated with them need to be practically zero. By applying travel rules to all transactions, micropayments could become impractical within the region.
The other problematic aspect is their treatment of unhosted wallets. These are crypto wallets held by individuals not exchanges and as such they give users the ability to conduct transactions without providing personally identifiable information. The EU proposals requires technological solutions to ensure asset transfers from unhosted wallets can be individually identified. Even leaving aside the obvious infringement of personal privacy such requirements imply, it is far from obvious that this is even practical to implement. As a result, it will effectively mean that most crypto companies operating within the EU will not conduct transactions with unhosted wallets under the risk of breaching the rules.
Final takeaways?
Overall, the proposed EU legislation seems to be designed to prevent a problem that is nowhere near as large as commonly perceived and in a manner that will only serve to stifle innovation and discourage crypto adoption within the region. If enacted – and here there is still hope for reprieve – the legislation will see the EU lose out to other countries and jurisdictions who are more embracing of this technology and who will therefore be better placed to reap the economic benefits.
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