EU Parliament Votes in Favour of Regulation That Could Impact Unhosted Crypto Wallets

Committees within the European Parliament have voted in favour of new transfer of funds regulation surrounding unhosted crypto wallets. The European Parliament's committee on Civil Liberties, Justice and Home Affairs (LIBE), and the Committee on Economic and Monetary Affairs (ECON) have voted to approve amendments to its Transfer of Funds Regulation that would require crypto exchanges to verify the identities of the owners of unhosted wallets with which they transact in advance of a transaction. The bill is not in the final stage of the legislative process, with a plenary session expected in April.

Legislators hope to ensure traceability of transfers between crypto service providers and so-called unhosted wallets so as to be able to better identify possible suspicious transactions and potentially block them.

An unhosted wallet is a term used by the Financial Action Task Force and the US Financial Crimes Enforcement Network, and adopted by other government and regulatory bodies. It means that an individual maintains their own private keys, known in the crypto industry as a “wallet” or “self-hosted wallet”, to delineate between assets controlled by a financial institution acting as a custodian and an individual.

Requirements to check if the information on the payer or payee is accurate is to be imposed on crypto transfers that exceed EUR 1,000 (roughly Rs. 84,000), according to a draft report. Pending a final vote, the bill could face trilogues with the European Commission and European Council as soon as mid-April.

However, while the European Commission and the European Council's versions of the regulation include an equivalent requirement for crypto service providers to ask users to identify the owners of external self-hosted wallets, they do not demand those servicers — primarily exchanges, to independently verify the identities of those wallet owners themselves.

The new provisions, while threatening to self-hosting wallets, are on track to face significant blowback from the Council and Commission.

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