The European Union (EU) passed a law banning anonymous crypto accounts and privacy coins. The European Parliament approved a proposal to prevent “the use of the financial system for the purposes of money laundering or terrorist financing” on March 19, which prohibits cryptocurrency platforms and service providers from supporting anonymous crypto accounts.
The reasoning
The EP justifies this decision by claiming anonymous crypto accounts expose the financial system to criminal risks because the crypto transfers cannot be traced. As a result, using such accounts makes it hard to identify transactions that might be risky for service providers.
In a 329-page document, the EP writes:
Providers of crypto services and crowdfunding platforms are exposed to the misuse of new channels for the movement of illicit money and are well placed to detect such movements and mitigate risks. The scope of Union legislation should therefore be expanded to cover these entities, in line with the recent developments in FATF standards in relation to crypto-assets.
The document also mentions anonymity-enhancing cryptocurrencies and anonymous crypto accounts as well as accounts that make it possible to conceal transactions as elements that should be outlawed. This indicates the legislators want to exclude privacy coins like Monero and zCash and assets that have been anonymized through cryptocurrency mixers.
How do privacy coins work?
Monero, which was created a decade ago, is the best-known ecosystem for anonymous crypto accounts. Its market capitalization was around $2.5 billion at the time of writing. Monero uses a ring signature system to anonymize transaction value. This system lets users hide how much Monero they transfer. It allows for mixing users’ public keys to conceal the address of the sender.
Monero also uses so-called stealth addresses, another privacy tool. When someone sends Monero to a public address, they are in fact sending it to an automatically generated “stealth address” invisible to any third party. This stealth address is unique and different for each transaction. It also obfuscates the identity of the recipient.
The critics
The law isn’t without its fair share of critics. Perhaps appreciatively, it doesn’t apply to unhosted wallet providers who don’t have control of their users’ cryptocurrency wallets, and they are thus free to hold anonymous crypto accounts. It doesn’t apply to hardware or software providers either.
EP member Patrick Breyer voted against the law, stating that people had the right to make online payments and donations without their “personal transactions being recorded.” He added that the EU doesn’t understand the Internet’s global nature if it thinks it can regulate cryptocurrency regionally.
How the EU contradicted itself
According to the website of the European Data Protection Supervisor:
In the EU, human dignity is recognized as an absolute fundamental right. In this notion of dignity, privacy or the right to a private life, to be autonomous, in control of information about yourself, to be let alone, plays a pivotal role. Privacy is not only an individual right but also a social value.
The right to privacy seems to incorporate the right to carry out private transactions, which anonymous crypto accounts afford. Somewhat apologetically, the document goes on:
While credit and financial institutions remain free to decide with whom they engage in contractual relationships, they should also be mindful of their central role in the functioning of the international financial system and in enabling the movement of funds or crypto-assets for the important development and humanitarian goals that civil society organizations pursue.
It adds that financial institutions should never invoke AML/CFT reasons to “justify commercial decisions” related to existing or potential clients.
Anonymous vs. pseudonymous accounts
Gemini makes the important distinction between these two types of accounts. A traditional bank account is neither anonymous nor pseudonymous because the bank has your personal data. It’s different with a pseudonymous or anonymous crypto account.
Bitcoin wallets have alphanumeric addresses, which let users send or receive Bitcoinand which anyone on the blockchain can see. These addresses do not provide a user with an anonymous crypto account, but a pseudonymous one, because entities can trace the public address’s info to the user’s real-world identity.
Pluses and minuses of anonymous transactions
Anonymous crypto accounts not only give users privacy, but also the ability to avoid government or other third-party censorship. Holders of anonymous crypto accounts are protected from excessive taxation. Many large companies and wealthy persons don’t want members of the public to know the value of their assets.
Anonymous crypto accounts also protect people who want to escape government sanctions, especially in countries that do not recognize cryptocurrency. Holders can raise funds or donate crypto to persecuted government opposition members, for example.
People use anonymous crypto accounts to buy and sell digital assets from different exchanges. It’s hard to trace transactions involving anonymous crypto accounts, which makes them attractive for money laundering and other illegal activities.
Anonymous transactions often take longer to process than traditional ones. Because they lack information about the user’s identity, they can cost more in fees as well. In the absence of careful management, this can lead to inaccuracies in records.
Finally, most exchanges put limits on the amount you can hold in an anonymous crypto account without having your identity verified. For example, eToro allows unverified users to buy cryptocurrency worth up to $2,250.
Anonymous crypto accounts pose a great risk to both the sender and recipient, especially when both parties are anonymous. If there is a breach, there is no way to locate either party.
Issues with applying the law
Needless to say, there are many possibilities to evade the new law. Users can create multiple wallets to make tracing harder. While this isn’t the same as having an anonymous crypto account, it does make tracking activity more difficult. Users can take measures such as not reusing addresses when carrying out transactions because this makes tracing individual accounts easier.
Laws related to anonymous crypto accounts and transactions vary by country, and many countries are obviously not subject to EU law. It will take time for the new law to take effect. It’s easy to change your place of residence so you don’t have to comply with it. For example, you don’t have to comply if you’re based in Asia for tax purposes, or you live in a country outside the EU six or more months a year.
According to industry expert Patrick Hansen, the new law mainly reaffirms existing AML rules and does not introduce radically new limits on self-custody wallets, payments, or peer-to-peer transfers. He thinks the law’s impact on the crypto market within the EU will be "extremely limited."
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