The proposed legislation would require exchanges to verify personal data behind any transaction.

Less than a week after a potential ban on proof-of-work (PoW) digital assets was dropped from the EU’s prospective MiCA framework, a new threat to the crypto industry could be emerging in the European Union. This time, it is non-custodial, or unhosted, wallets that are in regulators’ crosshairs.

On Thursday, March 31, the European Parliament Committee on Economic and Monetary Affairs will vote on an Anti-Money Laundering (AML) regulatory package that seeks to revise the current Transfer of Funds Regulation (TFR) in a way that extends the requirement of financial institutions to attach information on the transacting parties to crypto assets. The rapporteurs of the regulation are Ernest Urtasun from the Greens and Assita Kano from the Conservatives and Reformists group.

As crypto advocate Patrick Hansen from blockchain firm Unstoppable DeFi warned, the latest draft of the regulation would require crypto service providers not only to collect personal data related to transfers made to and from unhosted wallets (as they are already obliged to do) but also to “verify the accuracy of information with respect to the originator or beneficiary behind the unhosted wallet.”

The obvious problem with this language is that, in many cases, it can be difficult, if not impossible, for crypto service providers to verify an “unhosted” counterpart. Thus, to stay compliant and safeguard their place in the EU market, these companies would be forced to cut off transactions with unhosted wallets, Hansen fears.

Even if legislators put some guidelines for verification procedures in place, the potential operational costs of compliance would likely scare off smaller players and lead to further market concentration.

The draft also includes the obligation to inform the “competent AML authorities” of any transfer worth 1,000 EUR or more to/from an unhosted wallet. Moreover, in one year after the bill’s enactment, the EU Commission would be required to assess whether any “additional specific measures to mitigate the risks” from such transactions are needed.

It’s not quite clear what additional measures could be implied but, as Hansen warned, this could mean anything down to the outright ban on non-custodial wallets.

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