Coinbase
and wallet provider MetaMask are raising privacy concerns about the latest push to regulate crypto assets.
Lawmakers in the European Union on Thursday voted in favor of draft rules that would grant authorities access to details on the sender and recipient in all crypto transfers.
The proposal would effectively make anonymous crypto payments illegal. It not only cover transfers made through exchanges like
Coinbase Global
(ticker: COIN) but also self-hosted or private wallets such as MetaMask, the most popular crypto wallet with more than 30 million users.
The draft law will continue to be negotiated by lawmakers and is expected to go before a European Parliament vote this month.
Part of a package of new anti-money-laundering laws in the 27-member-state bloc, the proposal treats crypto transfers as fundamentally different from conventional payments.
Anti-money-laundering rules in the EU now cover transactions of more than €1,000 ($1,100). Lawmakers are looking to scrap that minimum threshold for crypto.
“Illicit flows in crypto-assets move largely undetected across Europe and the world, which makes them an ideal instrument for ensuring anonymity,” said Ernest Urtasun, a Spanish lawmaker and a parliamentary committee leader, in a statement. “With this proposal for a regulation, the EU will close this loophole.”
Assita Kanko, a Belgian lawmaker, added: “We also seek to normalize the crypto world as it grows, implementing rules that create trust.”
The crypto industry sees the situation quite differently.
Before the proposals were adopted, Coinbase CEO Brian Armstrong said via Twitter that the company would be required to collect, store, and verify information on users of private wallets before crypto could be sent or received to them by Coinbase customers.
In addition, Armstrong said that any time a customer received more than €1,000 in crypto from a self-hosted wallet, Coinbase would be required to report them to the authorities, even with no indication of suspicious activity.
“This eviscerates all of the EU’s work to be a global leader in privacy law and policy. It also disproportionately punishes crypto holders and erodes their individual rights in deeply concerning ways,” Armstrong said. “It’s bad policy.”
According to ConsenSys, the parent company of MetaMask, rules to track self-hosted wallets would have to target individual users.
This is “a much harder political position to be in than enforcement measures targeting companies,” Bill Hughes, the senior counsel and director of global regulatory matters at ConsenSys, told Barron’s in a statement.
“The regulation will almost certainly not have any measurable impact on financial crime while being most assuredly burdensome on people and businesses conducting lawful activity,” Hughes added. European lawmakers still have time to reconsider the regulations, he added, noting that the crypto industry would mobilize against the proposals.
ConsenSys has much to lose if MetaMask users look for other ways to transfer crypto. The company was valued at more than $7 billion in March, after raising $450 million in a recent funding round.
Bringing crypto under conventional anti-money-laundering laws has proven difficult. Cryptos are transferred on blockchain networks that are decentralized and anonymous by design. Wallets like MetaMask don’t require identity verification–they’re essentially a browser extension or internet address that act like a software bridge to the Ethereum blockchain.
“MetaMask also lets the user create and manage their own identities,” according to the Chrome Web Store’s description.
Wallet users generally do have to link their address to a regulated exchange to fund it with crypto, creating a conduit to verify customer identity. Information on blockchains is public, permanent, and traceable. But tracking assets from wallet to wallet requires blockchain forensics, and wallet users can obfuscate their tracks through technologies like “coin mixers.”
The Russian invasion of Ukraine only underscored the dilemma inherent in the anonymous nature of crypto.
ether,
and their peers have provided a lifeline to the global economy for Ukrainians. But they have also raised concerns around Russians using crypto to evade sanctions imposed by the U.S. and allies.
Coinbase and other companies have said they’re cooperating with the Treasury Department to block or freeze wallet addresses associated with sanctioned individuals or entities.
The war may also be heightening urgency to regulate and track crypto. Europe is at the forefront, though it’s turning into a messy affair. In the U.K., some crypto companies have opted to leave the country instead of trying to comply with a regulatory process they say is unfair and unworkable.
Europe’s crypto battle plans may also provide a template for U.S. regulatory efforts. President Joe Biden recently signed an executive order tasking federal agencies with proposals for comprehensive rules. In Congress, Sens. Cynthia Lummis (R.-Wyo.) and Kirsten Gillibrand (D.-N.Y.) are working on bipartisan legislation to regulate crypto companies and digital assets.
Write to Jack Denton at jack.denton@dowjones.com