The EU’s Last Breath
- Members of the European Parliament (MEPs) approved draft legislation imposing severe restrictions on crypto transactions.
- The effect of this legislation will be detrimental to the EU.
- The real motive behind this move may be to try to salvage a broken Eurozone.
A day before April Fool’s day 2022, MEPs in the Committee on Economic and Monetary Affairs and the Committee on Civil Liberties overwhelmingly voted in favor of a foolish piece of draft legislation. If finally approved, the legislation would force crypto service providers, such as centralized exchanges, to identify the senders and recipients of all crypto transactions regardless of amount and custody method. This information is to be mandatorily collected by centralized exchanges and made available to the authorities. Future regulation could also lead to further restrictions on the use of non-custodial wallets in the EU including an outright ban. This would, in effect, shift law-enforcement responsibilities to crypto exchanges, who would be responsible for identifying any risk of money laundering and terrorist financing. This misguided legislation will end up harming the EU’s position in a booming industry, drive capital out of the EU, hamper innovation, create unexpected negative consequences and achieve little or nothing of its intended purpose.
Ernest Urtasun, a Spanish MEP and co-rapporteur of the Committee on Economic and Monetary Affairs, justified these measures by saying that cryptocurrencies were an “ideal instrument” for criminals. He mentioned the Panama Papers and Pandora Papers as examples of money-laundering even though these scandals involved the tax-evading practices of traditional financial institutions. As Paul Grewal, the chief legal officer of Coinbase, warned ahead of the vote, however, “bad facts make bad law.” The justification for imposing these rules are based on incorrect assumptions regarding the practical realities of cryptocurrency use. As we argued elsewhere, cryptocurrencies are a poor choice for criminals and act as a godsend for law enforcement. Transactions are traceable and unalterable, which means a criminal network can be uncovered in the matter of seconds once one of its elements is discovered. Furthermore, the most recent data shows that the share of criminal activity on cryptocurrencies is at an all-time low of 0.15%. Using these justifications to handicap the sector may thus be a result of incompetence or because the motives lie elsewhere. As we argued elsewhere, “banning” or hampering Bitcoin is an admission of weakness. It is likely that the Eurozone is trying to centralize its remaining power in the face of serious economic, social and political problems. It is perhaps no coincidence that a few days after they voted for these provisions, the EU initiated a consultation on a CBDC - the digital euro.
Regardless of motive, in implementing the legislation as currently drafted, the EU will drive capital, innovation and business away to more accommodating jurisdictions like the US, the UK or Switzerland. It would be a gift to the cities, US states and countries engaged in the heated competition to attract this booming sector. The law would also be a boon for hackers and criminals as users will be more likely to hold their digital assets on centralized exchanges. This means they will be more vulnerable to a range of cyberattacks as well as the commercial failure and fraud of centralized exchanges. As Patrick Hansen, head of strategy and business development at Impossible Finance, commented, “most crypto companies won’t be able or willing to transact with unhosted wallets anymore in order to stay compliant.” Consumers would thus be deprived of one the main benefits of cryptocurrencies. Namely, the holding of one’s private keys, which constitutes true ownership of digital assets without the need of financial intermediaries. Burdensome regulation may also discourage new uptake as centralized exchanges would be increasingly wary of new clients. This trend has already been observed in traditional finance with the implementation of legislation such as FATCA, where the burdens of due diligence have stopped banks from dealing with legitimate customers.
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