- The EU is targeting privacy coins and self-custodial wallets under a new anti-money laundering regime.
- The changes, which include the ban on cryptocurrency mixers, are expected to go into effect this week.
- DeFi, DAOs, NFT platforms, etc. will need to do more due diligence on their users.
Restrict payments made through self-controlled wallets. Increase tracking of cryptocurrency transfers. Ban privacy coins.
Those are three key changes European Union lawmakers are set to make this week as they complete a three-year process of updating the bloc's rules on money laundering and terrorist financing in the financial sector.
What is at stake?
The European Commission, Council and Parliament are working out the final details of a comprehensive regulation in a process known as the “trilogue”.
Based on draft legislation and internal memos from negotiations, let’s take a look at what’s at stake for the cryptocurrency industry. DLNews:
The Anti-Money Laundering Regulation (AMLR) will work in tandem with the Crypto Asset Market Regulation (MiCA), parts of which are expected to come into force this year. When the AMLR law will come into force is still under negotiation, but it is expected to be sometime between 2026 and 2027.
A key challenge for crypto proponents is to ensure that the AMLR does not confuse the regulatory clarity established in MiCA. Ideally, both acts will work in harmony to establish clear rules for crypto ventures.
The EU has drawn praise from crypto industry leaders for offering a clear new regime in contrast to the chaotic situation in the U.S. But each new law risks placing undue burdens on crypto companies, especially startups and other bootstrapped ventures.
“Our main focus was to ensure that the scope of the AMLR did not exceed that of MiCA,” said Tommaso Astazzi, head of regulatory affairs at Brussels-based lobbying group Blockchain for Europe.
Join our community for the latest stories and updates
Both regulations exclude purely decentralized protocols, but all cryptocurrency companies licensed under MiCA fall under their jurisdiction, including some DeFi projects, DAOs, NFT platforms and wallet service providers.
Anonymization Tools
The AMLR directs companies to step up their efforts to identify and track customer transactions. Additionally, the regulation also cracks down on anonymization tools.
Since regulations were proposed in 2021, crypto lobbyists have fought hard to keep lawmakers from scrutinizing the crypto industry more closely than other financial sectors.
That hasn't been easy amid ongoing scandals, including Binance's admission that it violated U.S. law by failing to implement adequate anti-money laundering and anti-terrorist financing measures.
Ahead of the next tripartite talks on the AMLR on Wednesday, key cryptocurrency issues on the agenda include:
“Not many people were prepared to defend these privacy-enhancing tools.”
— Tommaso Astazi, Blockchain for Europe
The Council of the European Union is considering banning coins that promote anonymity, including privacy coins such as Monero and Zcash.
“There weren’t many people prepared to defend these privacy-enhancing tools,” Astazi said. Blockchain for Europe represents some of the largest crypto companies, including Binance, Coinbase and Kraken.
Crypto exchanges have been targeting privacy-focused coins this year, with OKX delisting several major privacy-focused trading pairs and Binance also coming under scrutiny, which could lead to further delistings in the future.
'High-risk' cryptocurrency mixers
The European Commission must submit a report assessing whether to ban crypto service providers offering “high-risk” privacy wallets and anonymous accounts offered by crypto asset mixers such as Tornado Cash.
The committee and council have suggested that the report should be submitted three years after the law comes into force, possibly by 2027, but Parliament wants to push that back by two years.
Self-Managed Wallet Restrictions
The regulations would prohibit companies from offering anonymous accounts, but in response to complaints from crypto industry advocates, lawmakers changed onerous language that would prohibit companies from offering self-hosted wallets that are controlled by individuals rather than commercial ventures.
Still, lawmakers are pushing to limit the amount of money merchants can receive from their own wallets without going through a licensed cryptocurrency company to €1,000, with fines for any violations.
Parliament has also asked the Commission to report back in three years on whether these rules need to be changed to align with plans to implement a European digital identity framework.
The provision is likely to be removed due to resistance from the commission and council over its feasibility, according to a person familiar with the policy process.
“The idea is that in a peer-to-peer environment, merchants should be able to accept cryptocurrency payments without relying on an intermediary. [like a crypto firm]” Astazi said.
“In the future, we hope to develop technological solutions that will enable citizens and merchants to accept cryptocurrency payments through their personal wallets in a manner that complies with know-your-customer rules.”
Customer Due Diligence for All Cryptocurrency Payments
Following the Oct. 7 Hamas attack on Israel, lawmakers rushed to block terrorist organizations from using cryptocurrencies to fund their operations, especially following reports that Palestinian groups were using digital assets to fund their militant groups.
In November, the European Parliament proposed adding additional due diligence measures for companies handling cryptocurrency transactions below 1,000 euros, though no such extra measures are required for other payment methods.
That's because terrorist organizations often use low-value transactions to hide how they raise funds.
Regulation, not directive
Cryptocurrency companies in Europe will have to comply with existing EU anti-money laundering laws. To register with national authorities, cryptocurrency service providers will need to meet AML standards.
However, the previous rulebook is a directive, not a regulation. A directive means that each member state can interpret and apply the rules in its own way.
This explains the huge disparity in the number of registered cryptocurrency companies in the EU: for example, the Czech Republic has around 10,000 registered companies, while Belgium has none.
However, the regulation is much stricter than the directive and the law will be enforced more evenly across the 27-nation bloc.
In addition, the EU's anti-money laundering package will create a new agency to oversee the rules once they are enacted into law.
This article was updated on January 17 to add more information about when the AMLR will come into force.
Do you have any tips about cryptocurrencies in Europe? Contact the author Email: inbar@dlnews.com
