WAGMI (We All Going To Make It)

EU Parliament Passes Privacy Laws to Kill Web3

WAGMI is a term used in the crypto community to build confidence, and encourage the community to not lose hope. Yesterday, European Union Members of Parliament voted in favour (58/52) of Transfer of Funds regulation, which is a de-facto ban on private / self-hosted wallets. A ban of this nature is a blunt instrument approach and anti-innovation. This also flys in the face of the European Commission’s Blockchain Strategy for Europe. Private wallets play a critical part in proving identity using public-private key infrastructure. Non-custodial wallets are a crucial component of what Web3 is all about. But Web3 is probably nothing, right? This is a big deal. Let me explain.

What Is the Transfer of Funds (TFR) Regulation?

The purpose of the European regulations on transfers of funds is to prevent payment systems from being used to launder money or finance terrorism. Money laundering is indeed a serious matter and a criminal act. Digital asset exchanges must follow the rules of the road set out by regulators in the jurisdictions they operate in.

What Does This Potential Ban Mean for You?

Scenario 1

Before sending or receiving crypto from a self-hosted wallet, an exchange will be required to collect, store, and verify information on the other party, which is not their customer, before the transfer is allowed.

Scenario 2

If you receive €1k or more into your wallet, the exchange has to inform the local regulator.

What Does This Mean for Europe?

In terms of blockchain and crypto innovation, Europe may now fall behind other jurisdictions like the U.S., U.K. and Asia. For example, how would DeFi work in this world?

It must be noted the ‘Transfer of Funds’ or ‘TFR’ rules for crypto are more strict than rules for banks and fiat money. Based on Chainalysis’ 2022 report, their research showed 5% of global GDP is laundered every year through the traditional financial system. This compares to 0.05% for crypto. Using terminology used by economists, (which I am not smart enough to be one), this is not consistent.

Let me share another strong data point. Forbes’ Steve Ehrlich’s 2021 piece, covered research carried out by Michael Morell, a 33-year veteran of the CIA. Mr. Morell published an independent paper commissioned by the newly formed lobbying group Crypto Council for Innovation (whose founding members include Coinbase, Fidelity Digital Assets, and Square) directly refuting crypto is the go-to money laundering currency of choice. In an expansive study, Morell came to two key conclusions:

1. The broad generalizations about the use of bitcoin in illicit finance are significantly overstated.
2. Blockchain analysis is a highly effective crime fighting and intelligence gathering tool.

Mr. Morell found the percentage of illicit transactions in crypto is minimal (less than 1% according to one report from Chainalysis), and falling. For additional context, he notes that estimates of illicit activity conducted through traditional intermediaries range between 2-4 percent of global GDP.

How Did the Vote Go Down?

A breakdown of how the MEPs voted is below

What Happens Now?

A critically important set of trilogue meetings will take place over the coming months to review and make these proposals law, or not.

What Is A Trilogue?

A trilogue is a meeting between the European Parliament members (MEPs), European Council representing government members, and the European Commission, which is an executive branch of the EU. We need the European Council and European Commission to challenge yesterday’s European Parliamentary vote based on informed and educated views.

Common Sense Is Not Common Practice

As Coinbase’s Chief Legal Officer, Paul Grewal, put it “bad facts make bad law”. To any policy makers out there, there is a balanced, fact based and data-driven crypto community willing to engage in meaningful dialogue to discuss these matters with each of you. Let’s not let 450 million people in the EU fall victim of the Semmelweis effect, where a new idea is rejected because it’s different to what happens today.

This process is not over yet, but WE MUST MAKE OUR VOICES HEARD