Traceability of Crypto-Asset Transfers soon Strengthened in EU

Crypto-assets, such as bitcoins and electronic money tokens, have gained popularity in recent years as a means of conducting financial transactions. However, their anonymity and lack of regulation have also made them attractive for illicit activities such as money laundering and terrorist financing. In order to prevent the misuse of crypto-assets, it is essential that their transfers be traced and identified.

The European Union has recognized the need for traceability in crypto-asset transfers and has taken steps to address this issue through draft legislation. This legislation, which is part of a new EU anti-money laundering package, aims to ensure that crypto-asset transfers can be traced in the same way as traditional money transfers. Under the new requirements, all transfers of crypto-assets will have to include information on the source of the asset and its beneficiary, which will be made available to competent authorities. The rules will also cover transactions from unhosted wallets, which are crypto-asset wallet addresses in the custody of private users. Technological solutions will be utilized to ensure that these asset transfers can be individually identified.

In addition to traceability requirements, the EU draft legislation also includes the creation of a public register of businesses and services involved in crypto-assets that may have a high risk of money laundering, terrorist financing, and other criminal activities. Providers of crypto-assets will be required to verify the source of the assets before making them available to beneficiaries and to ensure that there are no risks of money laundering or terrorism financing.

Currently, there are no rules in the EU for tracing crypto-asset transfers and providing information on the originator/beneficiary of such transfers. The draft legislation aims to fill this gap and ensure that crypto-asset transfers can be traced and suspicious transactions can be blocked. In order to further address the potential for misuse of crypto-assets, MEPs have also decided to remove minimum thresholds and exemptions for low-value transfers. This is due to the speed and virtual nature of crypto-asset transactions, which can easily circumvent existing rules based on transaction thresholds.

In summary, the EU is taking steps to address the need for traceability in crypto-asset transfers in order to prevent their use in illicit activities such as money laundering and terrorist financing. The draft legislation includes traceability requirements for all transfers of crypto-assets and the creation of a public register of high-risk businesses and services involved in crypto-assets. The removal of minimum thresholds and exemptions for low-value transfers also aims to address the potential for misuse of crypto-assets.

Guide for Crypto Companies

To comply with the new EU regulations on crypto-assets, a crypto company should take the following steps:

1. Implement technological solutions that enable traceability of crypto-asset transfers, including the inclusion of information on the source and beneficiary of the asset.
2. Verify the source of assets before making them available to beneficiaries and ensure that there are no risks of money laundering or terrorism financing.
3. Register the company with the public register of businesses and services involved in crypto-assets that may have a high risk of money laundering, terrorist financing, and other criminal activities.
4. Comply with the requirement to remove minimum thresholds and exemptions for low-value transfers in order to prevent the potential for misuse of crypto-assets.
5. Monitor and report suspicious transactions to the competent authorities as required.

See also How MiCA crypto regulation impacts crypto companies.

Dictionary

Anti-money laundering (AML) package: A set of laws, regulations, and procedures that are designed to prevent the misuse of financial systems for money laundering and terrorist financing.

Anonymity: The state of being anonymous, or not being identified or known.

Crypto-asset: A digital asset such as a bitcoin or electronic money token that can be used to conduct financial transactions.

Draft legislation: A proposed law that is still being considered and has not yet been formally adopted.

European Union (EU): A political and economic union of 27 European countries that are located primarily in Europe.

Exemptions: An exemption or exclusion from a particular requirement or rule.

High-risk: A situation or activity that carries a significant risk of negative consequences.

Illicit activities: Illegal or unlawful activities.

Low-value transfers: Transfers of small amounts of money or assets.

Minimum thresholds: A minimum level or amount that must be reached or exceeded in order to trigger a particular action or requirement.

Money laundering: The process of disguising the proceeds of illegal activities as legitimate funds.

Public register: A list of businesses or services that is available to the public.

Terrorist financing: The provision of funds or financial assistance to terrorists or terrorist organizations.

Traceability: The ability to track or follow the movement or use of something.

Traditional money transfers: The transfer of funds from one person or entity to another using traditional financial systems such as banks or wire transfer services.

Unhosted wallets: Crypto-asset wallet addresses that are in the custody of private users rather than being held by a central authority or third party.