European Union Proposes Crackdown on Non-Custodial Crypto Wallets

The European Union is considering a regulatory approach that will crack down on cryptocurrency’s “unhosted wallets”—wallets that are not held by a third-party intermediary also known as non-custodial. 

Examples of a non-custodial wallet include MetaMask, WalletConnect, or hardware wallets like Ledger and Trezor. 

The European Commission has proposed text that will oblige crypto service providers to obtain personal information from customers. 

“In the case of a transfer of crypto-assets from or to a crypto-asset wallet not held by a third party, known as an ‘unhosted wallet,’ the crypto-asset service provider or other obliged entity should obtain and retain the required originator and beneficiary information from their customer, whether originator or beneficiary,” the proposed EU Commission text reads. 

What’s more, should the service provider note that the information provided is inaccurate, incomplete, or suspicious, it should assess on a “risk-sensitive basis” whether to reject or suspend the transaction, and whether to report the transaction to the relevant financial intelligence unit. 

The crypto industry has responded in force since the proposal began making the rounds. Coinbase's chief policy officer Faryar Shirzad tweeted that the "latest draft could significantly violate individual financial freedom, irreparably harm the cryptoeconomy, [and] stifle the future of innovation across the EU."

Simon Lelieveldt, a former policy analyst at the Dutch central bank who now focuses on crypto regulations, had much harsher words for the proposal.

"If you want to kill privacy, this is the best way to do it," he told Decrypt.  "No way this will stand up over time, but in 15 years' time a lot of damage can be done still."

The European Parliament will vote on this language on Thursday, March 31, 2022. 

This proposal comes hot off the heels of another key European vote on proof-of-work (PoW) blockchain technology earlier this month. 

European Union nixes Bitcoin mining ban

Earlier this month, EU lawmakers agreed to drop all mention of a potential PoW mining ban from the Markets in Crypto Assets legislative package—a set of regulations aimed at consolidating the EU’s approach to crypto. 

The European Parliament’s Committee on Economic and Monetary Affairs rejected previous versions of this package that contained what was described as a “de facto” ban on PoW cryptocurrency mining, used by major cryptocurrencies like Bitcoin and Ethereum. 

Originally, the text included a section that called for these blockchains to “meet minimum environmental sustainability standards,” a clause included off the back of the well-documented impact PoW blockchains have on the environment. 

“We think it’s not a good thing. We hoped to have something in the legislation that would at least open the debate and our discussion on some measures that could address the environmental impact of crypto assets,” an unnamed advisor close to the negotiations told Decrypt at the time.