There are updates on the Transfer of Funds Regulation (TFR) of the EU. Unlike self-custody wallets like Coinbase, the verification obligation for so-called unhosted wallets, like MetaMask, is apparently falling, but the reporting obligation for crypto exchanges is even being tightened. To learn more about the difference between Coinbase and MetaMask, check out the Metamask vs Coinbase wallet comparison.

What does this mean for crypto-Europe?

When it comes to crypto regulation in the European Union, things are going from strength to strength. After the MiCA regulation almost waved through a trading ban for proof-of-work-based cryptocurrencies such as Bitcoin (BTC), the EU Parliament shocked the local industry with a new legislative proposal. We are talking about the Transfer of Funds Regulation (TFR). There are now updates. In the course of the trialogue between the three instances of European legislation (EU Parliament, EU Council, and Commission), the EU Council has spoken out against the information obligation for unhosted wallets, according to a tweet by the interest group Blockchain for Europe.

Should the EU Council prevail, a much-criticized point of contention within the draft law would be off the table? Critics had complained that the verification of self-managed wallets like Coinbase by exchanges would hardly be possible without drastic interventions in sensitive personal rights. This threatens to create a data honeypot at Crypto Asset Service Providers – a target found by hackers.


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Reporting obligation to be tightened

However, the crypto sector is likely to be hit hard by the tightening of the reporting obligation for transactions, on or from exchanges. The original text of the law spoke of a 1,000-euro threshold above which crypto asset service providers are required to report to the competent supervisory authority. According to the current state of negotiations, even every (!) Transaction is reportable. For example, the EU Parliament wants to implement the FATF Travel Rule and promote money laundering. This was confirmed to us by an insider on request.

It could be critical, especially for smaller providers of crypto services. An automated reporting of all transactions to authorities can only be implemented with sophisticated software.

The reporting obligation was also criticized, as the traditional financial sector usually has a threshold of 10,000 euros – and only if there is a suspicion of money laundering. Reporting any crypto transaction to the authorities would not only be bureaucratic madness but goes far beyond the standards in banking. The consequence of the TFR: the flood of reports could overwhelm supervisory authorities and reduce the capacity for actual money laundering cases.

There are no innovations with regard to the transaction ban with non-compliant providers of crypto transfer services. There is still a risk that Bitcoin exchanges will prevent transfers from and to self-managed wallets in the future, as they cannot verify their compliance. That would be the end of BTC Self Custody in the EU.

Although the trialogue is still ongoing, there can be no question of the all-clear at the current stage.