New legislative proposal for crypto transfers hits crypto platforms

As part of its comprehensive approach against money laundering and terrorist financing, the European Commission submitted its latest legislative proposal on crypto services for approval by the European Parliament last month. This proposal sets new requirements and obligations for processing and receiving crypto transfers. Projective Group describes what impact this legislative change will have on business operations of crypto service providers in Europe.

In early December 2021, the European Commission announced that it will submit its latest legislative proposal relating to crypto services to the European Parliament for approval. This proposal, a revision of the funds transfer regulation introduced in 2015, is part of the Commission’s comprehensive approach against money laundering and terrorist financing and aims to implement the so-called travel rule recommendation of the Financial Action Task Force.

Although the Commission has not yet set formal timelines for the implementation of the law change, it is expected to be implemented together with the previously announced Markets in Crypto Assets (MiCA) proposal. This means that crypto service providers will likely have until 2024 to implement the necessary changes.

New requirements for making and receiving crypto transfers

The main effect of the proposed legislative amendment will be to equalise the regulatory framework between payment service providers and crypto service providers regarding the inclusion of information when processing transactions. This means that crypto service providers will be subject to additional requirements for sending both crypto transfers and fiat payments, for receiving these payments, as well as for holding and blocking transactions that do not meet the set requirements.

For sending crypto transfers, as well as fiat payments to other crypto service providers, the amendment to the law requires crypto service providers to send the following information elements with them:

1. The full name of the client.
2. The client’s account number if the client maintains an account with the service provider.
3. The address, official personal identification number, identification number or date and place of birth of the client of the service provider.
4. The full name of the beneficiary of the transaction.
5. The beneficiary’s account number if the beneficiary maintains an account with the beneficiary’s service provider.

Any crypto service provider that receives a transaction from another crypto service provider must thereby verify that the information described under element 4 and 5 is present and complete. Payments lacking this information, partially or completely, cannot be accepted by a receiving crypto service provider.

In addition to these strict requirements, the change in the law also offers an option to send less information along. To qualify for this lighter information requirement, in addition to several additional features, the value of the outgoing transfer, or the total value of related transfers, must be less than €1,000. If a transaction qualifies under this lighter disclosure requirement, only the first two information elements should be present with an outgoing payment.

Regardless of whether an institution makes use of this lighter information duty, for every transaction, the information received and sent must be recorded for at least five years, and if requested, handed over to supervisory and investigative authorities.

Industry challenges

The practical implementation of the requirements from the amendment to the law will require a far-reaching review of the current practices of crypto service providers and will pose challenges for the entire industry.

Technical challenges

One of these challenges is levelling the legal playing field between payment service providers and crypto service providers, regardless of the differences in the current payment infrastructure. In addition to developing processes and procedures to collect and verify transaction information, crypto service providers will need to develop a process and infrastructure that allows this information to be shared with other crypto service providers. The amendment to the law hereby specifies that although the manner in which the information is to be provided is form-free, it must in any case be shared immediately and securely with other crypto service providers. Currently, a system that meets these requirements is not yet in place. Whereas payment service providers can use the SWIFT system for their payment flows, a similar system does not exist for crypto service providers. Encrypting the required information in the transaction itself may provide for this, but this will either be impractical due to the block size and gas fees of many popular blockchains or result in an unacceptable network load.

Anonymity

Besides the practical implementation of the amendment to the law, it will also pose a threat to the services of parties focused on privacy and anonymity. Although the law amendment explicitly excludes peer to peer transactions, the provision of custodian wallets and the processing of transactions from, and to, these wallets by an external service provider does fall within the scope of the law.  This is expected to have firm implications for crypto service providers specialising in offering anonymous wallets as well as sending or collecting transactions with privacy coins. These parties, in order to comply with the change in the law, will have to subject their clients to KYC processes and provide their transaction traffic with the required data; an obligation at odds with the privacy-focused services these parties provide.

Practical challenges

The enforceability of the law change will pose challenges for all players within the industry. The upcoming law change concerns a European regulation and will therefore apply to any crypto service provider established as well as operating in a Member State. This means that not only European players will have to comply with the change, but also non-European service providers active in the European market. However, in contrast to the usual payment system, it is impossible for crypto service providers to determine from a wallet address who the issuing party of this address is, and whether it was issued by a service provider established or operating in Europe. Although commercial parties are likely to provide a solution to this over time, the law change will undoubtedly lead to an additional burden on crypto service providers and further increase the barrier to entry within the sector.

Are you interested in the impact of this law change on your operations or do you need help with your (crypto) company’s compliance requirements?