Bitcoin fell $2,000 from $47,500 to $45,500 in four hours after news broke that the EU will cripple innovation in the blockchain space. The European Parliament voted today to ban ‘unhosted wallets’ within the European Union.
According to their terminology, a non-hosted wallet is a non-custodial wallet that is completely controlled by a person. This includes cold wallets such as Ledgers, Trezor, and SafePal, as well as hot wallets such as MetaMask, Trust Wallet, MEW, and many others. The only crypto wallets allowed are those of exchanges that require all users to complete KYC checks. KYC stands for Know Your Customer and usually falls within the centralized financial sector to protect against money laundering.
To use a non-hosted wallet, you must register it with an exchange and provide your full identity. Our go-to man on Twitter, Patrick Hasen of Unstoppable DeFi, broke the news in a 15-part Twitter thread† Hansen told us:
The EU Parliament vote on the TFR is a major disappointment and a major threat to individual privacy and the use of self-deposit wallets in the EU. It introduces unachievable wallet verification requirements and unwarranted reporting requirements for crypto companies that would have huge negative consequences for both EU citizens and businesses. Fortunately, we still have the upcoming trilogue negotiations to avoid the worst.”
Unhosted wallets will not be excluded from existing ones within the EU, but you cannot communicate with an exchange to convert your crypto to fiat or vice versa.
Can DeFi survive in Europe?
Furthermore, DEXs will now require customers to register and prove their identity before they can interact on the blockchain. This completely defeats DeFi’s point. If I have to register with a company and hand over my ID to transact, that information has to be centralized and vulnerable to attack. One of the best parts of DeFi is its ability to communicate easily and without the risk of your privacy being stolen.
How or where DeFi companies operating entirely on the blockchain will store the records of their clients’ records is unknown. This will add additional regulatory and financial overhead to any DeFi project in the EU as they now have to store each client’s personal and sensitive information.
Alongside this news came the decision to require all wallet users who interact with exchanges to undergo KYC checks. Currently, the limit is 1,000 EUR, above which you must register with an exchange and disclose your personal information. With the new legislation, any customer using an exchange must complete the KYC process.
Technically, you should still be able to send transactions between personal non-hosted wallets for any amount. However, the most challenging aspect is whether you want to send crypto from an exchange wallet to a friend who lives outside the EU. In order for your friend to receive their crypto, they need to register with your exchange. Our aim is always to be impartial, but this just seems ridiculous to me.
How long do we have?
Companies will have nine months to adapt to the new regulations and then 18 months to ensure they are fully compliant with the new regulations. Whether any European DeFi companies will remain in the EU after this ruling is issued is up for debate. Given the nature of the industry, they should be able to move outside of Europe to escape these regulations. Non-custodial wallets cannot be banned completely anytime soon due to their decentralization by design.
A European citizen can’t be stopped from interacting with a DeFi project outside the EU that doesn’t require a KYC, so this could be Europe just shooting itself in the foot by alienating innovative companies. For example, Portugal, a hotspot for DeFi and blockchain innovation, will certainly not be happy with the outcome of this vote. There is still time to change the law as it is now moving into trilogies where further negotiations will take place. After this, MEPs will vote on the agreed version of the law, and it will become law.
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