The crypto sector is still reeling from a string of votes in the European Parliament that some warned could prove regulatory overkill, attendees at the Paris Blockchain Week Summit discovered Wednesday.
Recent EU plans to curb the energy footprint of proof-of-work technology – which some feared could amount to a bitcoin ban – failed to get through the European Parliament when voted on in March. But a second, also controversial, anti-money laundering measure did pass and could now become law if governments also sign up.
Under a planned expansion of existing banking measures known as the travel rule, parties facilitating crypto transactions would have to identify participants. EU lawmakers want that to apply even for the smallest payments or those made to unhosted wallets, where the asset is held by a private individual rather than a regulated exchange.
Proponents, including lead lawmaker Assita Kanko, have argued the travel rule will help cut crime, and have previously told CoinDesk it could be a spur for innovation in a sector that prides itself on creativity.
“If the banking sector, that the crypto people think is actually boring and old, is surviving the travel rule … why would the very chic, cool crypto people not be able to do so?” she told CoinDesk shortly after the measure was voted through her committee on March 31. “They could work it out…. I guess I'm telling them to try.”
But in Paris, some point out that the existing rule, which requires institutions like banks to report any dodgy-looking payments to the authorities, doesn’t work well even in the conventional financial sector – and is even worse suited to blockchain-style tech.
The rules would mean crypto exchange providers must “provide a full report to the authorities … when they see an unhosted wallet is involved, without even considering the threshold,” Hedi Navazan, head of compliance for Crystal Blockchain, told attendees Wednesday.
That would mean the financial intelligence units that gather suspected laundering cases “will be bombarded” with the data known as suspicious activity reports, she said – even though “they already don't have the capacity” to process the copious information they now get from banks.
That chimes with findings by the U.K.’s Law Commission, which complained in June 2019 that “too many low-quality” laundering reports were sent to the authorities, “undermining the entire process.” Even the EU’s own regulator, the European Banking Authority, has complained of a “tick-box” approach, where financial institutions merely fulfill procedures rather than identifying risks.
The EU’s approach also doesn’t acknowledge that transparent blockchains allow payments to be traced, Navazan said, and could mean exchanges just abandon transactions with unhosted wallets all together.
Yet some have also expressed concerns about much worse effects.
Joshua Ellul, director of the Centre for Distributed Ledger Technology at the University of Malta, has told CoinDesk that recent decisions about crypto payments were “malinformed.”
Crypto “is definitely used for this [money laundering] activity just like cash is,” Ellul said in an interview shortly after the European Parliament vote but warned that lawmakers were “rushing to a solution.”
“Stifle it too early, and operators in a space will just move to another area,” he said.
He’s not the first to warn that an industry faced with heavy-handed laws could simply skip the bloc. But others are more upbeat, warning that regulation is inevitable – and that responding constructively to it would at least silence incumbent banks and others skeptical about crypto newcomers.
The EU’s move “might hurt short term industry, because if someone doesn’t want to give his wallet information and he moves elsewhere, then, yeah, you might suffer,” Michael Amar, co-host of the summit, told CoinDesk.
“But in the end, if you want to be mainstream, it needs to be regulated,” he said. “We know that it needs to be kosher… let’s not give the excuse for the people who don’t want to have the industry.”