Controversy with the EU Transfer of Funds Regulation

The Transfer of Funds Regulation is an EU proposal that aims to extend wire transfer requirements to the crypto industry and implement the 'travel rule' - a Financial Action Task Force requirement to collect and send customer data along with transactions.

The last round of discussions took place on 31 March. There was much fanfare – the European Parliament voted in favour of removing thresholds for scrutinising crypto transfers, including those from unhosted wallets. Gone are the days of self-regulated internal customer risk assessment, where crypto exchanges set their own thresholds for conducting KYC checks, and ask for enhanced due diligence information only once these were met. Bringing unhosted wallets into the mix has also been met with fierce criticism from the sector.

Brian Armstrong, CEO of Coinbase, lamented “Imagine if the EU required your bank to report you to the authorities every time you paid your rent merely because the transaction was over 1,000 euros. Or if you sent money to your cousin to help with groceries, the EU required your bank to collect and verify private information about your cousin before allowing you to send the funds.”

The EU’s concerns about the crypto industry’s thresholds are not surprising – tales of 500,000 euro thresholds being levied on consumers before an exchange conducts any sort of enhanced due diligence on a customer are not uncommon. But Armstrong does have a point – even cash and e-money have thresholds before due diligence is required – and in those situations there is no blockchain to look two steps back on. The risk-based approach seems to have been left to one side out of concerns about money laundering. But such a lack of pragmatism means the alternative could be the emergence of underground P2P networks that seek to continue to operate anonymously. There are also major conflicts with an individual’s right to privacy – something that the AML framework does not always coexist peacefully with. By removing the risk-based approach, it will force businesses to collect vast troves of data about their customers, even when the risks do not warrant it. The discussion about privacy versus money laundering risks from crypto is far from over.

Also on the table is a requirement for the European Banking Authority (EBA) to create a public register of crypto asset service providers that may face a high risk of money-laundering and other criminal activities. They would also include a list of non-compliant businesses, with the aim of preventing money-laundering, terrorist financing and other criminal activities. Crypto businesses will need to verify that the source of the transfer is not subject to restrictive measures and that there are no risks of money laundering or terrorism financing before making funds available to beneficiaries. It’s not clear yet how crypto businesses will implement this – will there be a new form of sanctions screening where the names of senders will need to be screened on the blockchain?

At Fiat Republic, we have a legacy of experience in the payments industry and understand the challenge for businesses to get to grips with the world of regulation. Many firms are taking crucial steps now and embedding customer-centric policies, hiring experienced staff from the traditional finance sector, including from the regulators themselves. We will continue to support the crypto industry and advocate for a sensible approach with the regulators.

This is exactly why we created our crypto consortium; to represent responsible crypto providers, and work closely with regulators to lead standard-setting for the asset class. Ultimately, we want to give the crypto industry a unified voice, and have a say in what the future of cryptocurrency is.

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