Bitcoin dropped $2,000 from $47,500 to $45,500 in four hours after news broke that the EU is set to cripple innovation in the blockchain space. Today, the European Parliament voted in favor of outlawing ‘unhosted wallets’ within the European Union.
Unhosted wallets
According to their terminology, an unhosted wallet is a non-custodial wallet managed entirely by an individual. This includes cold wallets such as Ledgers, Trezor, and SafePal, as well as hot wallets like MetaMask, Trust Wallet, MEW, and many others. The only crypto wallets allowed will be ones held by exchanges that require all users to complete KYC checks. KYC stands for Know Your Customer and is typically within the centralized finance industry to protect against money laundering.
If you wish to use an unhosted wallet, you must register it with an exchange while revealing your entire identity. Our go-to man in the Twitter field, Patrick Hasen of Unstoppable DeFi, broke the news in a 15 part Twitter thread. Hansen told us:
The EU Parliament’s vote on the TFR is a big disappointment and a big threat to individual privacy and the use of self-custody wallets in the EU. It introduces unfeasible wallet verification requirements and unjustifiable reporting requirements for crypto companies that would have massively detrimental effects for EU citizens and companies alike. Fortunately, we still have the upcoming trilogue negotiations to prevent the worst.”
‘Unhosted wallets’ will not be banned from existing within the EU, but you will not be able to interact with an exchange to convert your crypto into fiat or vice versa.
Can DeFi survive in Europe?
Further, DEXs will now require customers to register and prove their identity before being able to interact on the blockchain. This completely defeats the point of DeFi. If I have to register with a company and hand over my ID to transact, then that information will need to become centralized and is vulnerable to attack. One of the best parts of DeFi is the ability to interact with ease and without risking having your privacy stolen.
How or where DeFi companies who operate entirely on the blockchain will store the data of their customers’ records is unknown. This will add additional regulatory and financial overheads to every DeFi project in the EU as they now have to store every customer’s private and sensitive information.
Alongside this news came the decision to require all wallets users interacting with exchanges to undergo KYC checks. Currently, the limit is 1,000 EUR, above which you are required to register with an exchange and reveal your personal information. With the new legislation, any customer using an exchange will need to undertake the KYC process.
Technically you should still be able to send transactions between personal unhosted wallets for any amount. However, the most challenging aspect is if you want to send crypto from an exchange wallet to a friend who lives outside of the EU. For your friend to receive their crypto, they would have to register with your exchange. Our goal is always to be impartial, but this seems simply ludicrous to me.
How long do we have?
Companies will have nine months to adapt to the new ruling and then 18 months to ensure they fully comply with the new regulations. Whether any European DeFi companies will stay in the EU after this ruling is enacted is up for debate. Given the nature of the industry, they should be able to relocate outside of Europe to skirt these regulations. Non-custodial wallets cannot quickly be banned outright due to the decentralization by design.
A European citizen cannot be stopped from interacting with a DeFi project outside of the EU that does not require KYC, so this may be Europe simply shooting themselves in the foot by alienating innovative companies. For example, Portugal, a hotspot for DeFi and blockchain innovation, will surely not be happy with the result of this vote. There is still time for the act to be amended as it now passes to trilogies where further negotiations will occur. After this, MEPs will vote on the agreed version of the act, and it will become law.
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