Compliance in Action: Understanding AML Rules for Bitcoin, Ethereum, and Self-Hosted Wallets in the EU

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    • The European Banking Authority proposes amendments to anti-money laundering guidelines, potentially marking transactions involving self-hosted wallets as high risk.
    • Enhanced due diligence procedures would be applied to such transactions, requiring users to provide substantial personal and financial information.

In a recent move to combat financial crime, the European Banking Authority (EBA) has launched a consultation on modifying due diligence guidelines for anti-money laundering (AML) practices, rendering transactions involving self-hosted wallets as potentially hazardous.

Earlier this year, the EU Parliament greenlighted four AML legislations, imposing the same rigorous due diligence requirements on crypto-asset service providers (CASPs) as applied to conventional financial and credit institutions.

Among the latest propositions, two notable additions have caught the crypto community’s attention. As expected, transactions involving mixers or privacy-oriented encryption are deemed high-risk. The AML policy has consistently overridden privacy rights in the financial world, albeit failing to acknowledge that privacy preferences do not necessarily indicate fraudulent intentions.

More contentiously, the new guidelines classify self-hosted wallets as risky. This means transactions involving a self-hosted wallet and a crypto exchange necessitate enhanced due diligence (EDD). For instance, while transferring money from a bank account to a new crypto exchange would typically require standard identity verification, if the funds originate from a self-hosted wallet, the process becomes much more invasive.

The user will have to substantiate the source of funds, their wealth, occupation, and the purpose of the transaction.

This stricter scrutiny also applies to those performing frequent cross-border transactions, which can be an unnerving experience, undermining the user’s sense of control over their finances. Ironically, this sense of control is one of the primary reasons for choosing self-hosted wallets.

These guidelines raise the question of whether legislators had such implications in mind. Accompanying the MiCA crypto legislation was an AML measure that enforced the travel rule on crypto transactions. This rule mandates transaction details of the sender and beneficiary to be transmitted with the transaction, regardless of the amount involved.

However, when a self-hosted wallet is part of the transaction, the travel rule only applies to transactions over €1,000 and does not apply to P2P transactions due to practicality issues.

This higher threshold may suggest that legislators recognize the unique factors associated with self-hosted wallets, including personal control. However, there are those within the banking industry who argue that the allowance of pseudonymous self-hosted wallets clashes with the general trend towards outlawing anonymous or pseudonymous activities.

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