EU reaches provisional agreement on stricter AML rules for crypto firms

The European Union has reached a provisional agreement to toughen anti-money laundering (AML) regulations focused heavily on the crypto sector, announcing its new set of proposed restrictions in a press release today.

According to the announcement, crypto-asset service providers (CASPs) must now perform due diligence on customers transacting €1,000 or more. The rules also focus on self-hosted crypto wallets to mitigate perceived risks.

The agreement comes as part of a broader EU AML package that intends to close loopholes currently exploited by money launderers. Outside of crypto, the package sets a €10,000 limit on cash transactions and requires identification for occasional cash transactions between €3,000 to €10,000. The EU Council believes these steps limit criminals’ ability to launder illicit proceeds.

The new CASP requirements force know-your-customer (KYC) checks on transactions over €1,000 — even those involving self-hosted wallets. The EU aims “to mitigate risks in relation to transactions with self-hosted wallets,” according to a statement. Such changes indicate that the authorities are keen on pressuring decentralized finance protocols utilized in non-custodial settings.

Additionally, CASPs must conduct enhanced due diligence for cross-border transactions to correspondent crypto companies. This comes following anti-money laundering standards set for CASPs under the EU’s Markets in Crypto Assets (MiCA) legislation, which it passed in late 2022.

By targeting unhosted wallets and cross-border activities, the regulations jeopardize income streams for those relying on pseudo-anonymous cryptocurrency usage. The policies suggest that EU authorities also plan to increase direct oversight of public blockchains.

Notably, the provisional agreement strengthens requirements around identifying beneficial ownership, aiming to increase transparency. Beneficial ownership refers to the actual, underlying individuals who ultimately own or control a company or legal entity, even if the assets or property are legally registered to another name.

The new rules clarify that beneficial ownership is determined through two key components: ownership and control. According to the EU Council and Parliament’s agreement, both elements must be analyzed to identify all beneficial owners associated with an entity. This includes foreign entities conducting business or owning real estate in the EU.

The agreement sets a 25% ownership rate as the threshold for qualifying an individual as a beneficial owner.

In addition, the regulations are designed to delve into complex, multi-layered ownership structures that have previously obscured true beneficial ownership. Specific data and record-keeping provisions will also assist authorities in uncovering beneficial ownership more easily for oversight purposes.

While clamping down on illegal behavior, the rules may also risk overreach into lawful activities. They open possibilities for improper surveillance, profiling, and even unintended collisions with existing human rights protections.

As with most crypto policy discussions, opinions differ sharply on the appropriate balance between enforcing laws and preserving financial freedoms. With global regulatory bodies such as the EU accelerating crypto oversight, the foundational aspects of privacy and self-sovereignty behind crypto may gradually become compromised over time as regulation coincides with broader adoption.