Treasury Abandons Plans to Introduce KYC on Unhosted Wallets in UK

The United Kingdom Treasury has backtracked on plans to require all senders of crypto funds to collect information that identifies the recipients of those funds.

The Treasury said it makes little sense to create a know your customer (KYC) data collection rule for unhosted, or private, wallets.

In the report, the Treasury said: “The government does not agree that unhosted wallet transactions should automatically be viewed as higher risk; many persons who hold cryptoassets for legitimate purposes use unhosted wallets due to their customizability and potential security advantages (e.g. cold wallet storage), and there is no good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.”

Treasury decisions follows consultation with major players

The decision follows consultation with regulators, industry players, academics, and government agencies on the topic of updating the rules on money laundering.

The proposed rule mandated that financial institutions and crypto exchanges collect and store information on international payments, which many in the industry deemed impractical and restrictive.

Respondents said that there would be both short-term and long-term costs, though some noted that the costs could be partially offset by the benefits of being a better-regulated asset class. 

The U.K. Treasury has accepted that implementing the travel rule will result in costs to the industry but emphasizes that it will bring overall benefits. 

However, it is easing the rule such that fiat and crypto transfers will no longer have to calculate the de minimis threshold and that information requirements on unhosted wallets will be required only on a risk-sensitive basis.

Unhosted wallets a major regulatory agenda

The U.K. is not the only country that is focusing on unhosted wallets. Several regulators from across the world have issued statements on the matter, saying that they will need some form of control.

The EU parliament recently voted in favor of an amendment that would impact unhosted wallets. The crypto industry swiftly responded with criticism, saying that it would have a major effect on privacy. 

Critics, including Coinbase, said that it would “unleash an entire surveillance regime on exchanges, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets.”

DeFi to be impacted by new regulations

The greatest impact the rules on unhosted wallets will have is on the decentralized finance (DeFi) market. DeFi has been on the radar of authorities for a while, both for its decentralized nature and for the financial risks they say it imposes.

The International Monetary Fund has said that DeFi poses financial stability risks, asking for regulation of stablecoin issuers. It acknowledges that regulating decentralized entities is difficult, and so also suggests that some controls be imposed on centralized exchanges.

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