New EU rules may threaten your security – what you need to know

the Financial Action Task Force The Travel Rule, designed to combat money laundering and terrorist financing, is central to the debate about balancing regulatory oversight and privacy. Financial institutions, incl Virtual asset service providersmust be collected Know your customer Information and share it with other institutions involved in the transaction.

Originally submitted for Conventional finance in 2012The rule has now been expanded to include Bitcoin transactions. Critics argue that applying this rule to Bitcoin undermines its principles of privacy and financial freedom, while also introducing new risks and unintended consequences.

Headquartered in Paris, France, the FATF is a non-elected international organization established by the G7 countries in 1989. Over the decades, its mandate has expanded to include a range of member states. The 2019 initiative aims to address perceived “threats” to the integrity of the financial system. This expansion has placed Bitcoin and other digital assets within the scope of the Financial Action Task Force, deeming them potential threats to the existing financial system. Countries that refuse to comply with FATF recommendations risk being excluded from the global financial network.

Unlike other digital assets that are often lumped under the “crypto” umbrella, Bitcoin stands out from the crowd due to its decentralized and immutable ledger. As the first and most widespread digital currency, Bitcoin is designed to operate outside the control of central authorities. Its pseudonymous nature ensures that transactions are visible on the blockchain, but without revealing sensitive personal details. This transparency already provides a level of accountability while preserving individual privacy, making FATF measures appear redundant and inconsistent.

Bitcoin is not just another “crypto-asset”. It is a protocol with a clear purpose to serve as a decentralized and censorship-resistant monetary network. Applying the FATF’s Travel Rule to Bitcoin undermines its core principles, particularly its emphasis on user privacy and financial freedom. This regulatory push risks turning Bitcoin into yet another tool for surveillance, eroding the very freedoms it was created to protect.

Privacy and security

Bitcoin users already face challenges in protecting their financial privacy. The Travel Rule requires verification of wallet ownership and collection of personal data. This goes against Bitcoin’s basic idea of ​​enabling individuals to control their money without intermediaries. Enforcing compliance can push users toward centralized guardians, exposing them to risks such as hacking, data breaches, and authoritarian surveillance.

The erosion of privacy remains the most controversial issue. It is important to note that the Travel Rule requires VASPs to forward KYC data to other VASPs with whom their clients transact, just as in the traditional application of the Rule to financial institutions. High-profile data breaches are becoming increasingly common.

Aggregating personal and transactional data across multiple custodians increases the potential for misuse, whether through hacking or unauthorized monitoring. For individuals, this process involves handing over personal information to an expanding list of third parties, increasing vulnerability to identity theft and loss of autonomy.

Critics say these measures are excessive, especially given the anonymous nature of Bitcoin transactions. Unlike the United States, where there are exceptions for smaller transactions, stricter enforcement in the European Union actually requires reporting of almost all transactions. This requirement captures legitimate users and creates barriers to entry for those seeking financial independence through Bitcoin.

Regulatory Burdens: The UK formalized the Travel Rule on 1 September 2023 through amendments to the Money Laundering, Terrorist Financing and Money Transfer Regulation 2017. At the same time, the EU has incorporated the Travel Rule into the Money Transfer Regulation, which requires compliance from assets Cryptocurrency service providers by December 30, 2024 as part of the Crypto Asset Markets Regulation, also known as MiCA. the Organizing money transfer Both MiCA were formally published in the Official Journal of the European Union on 9 June 2023, and are scheduled to be implemented from 30 December 2024.

The UK’s approach adapts the travel rule to its existing anti-money laundering framework. The European Union is incorporating the travel rule into its MiCA framework, creating specific rules for digital assets.

The Travel Rule also introduced compliance burdens that disproportionately affect institutions and small businesses. While some countries have implemented thresholds for collecting additional information, the rule requires compliance with all transfers of virtual assets in terms of data forwarding, regardless of the transaction amount. These measures are intended to enhance transparency but also increase operational costs for startups and smaller entities, giving preference to established players who can absorb expenses and leaving little room for new entrants.

Implementation undermines financial inclusion, the main promise of Bitcoin. By introducing barriers such as identity verification and address verification, the rule alienates those living under authoritarian governments and underbanked populations who would benefit most from decentralized financial systems.

Lessons from traditional finance

The travel rule was initially implemented in traditional finance more than a decade ago, and was intended to reduce money laundering. However, its record remains modest. Studies consistently estimate that global money laundering in traditional finance is responsible 2-5% of GDPa range that has not changed since 1998. This stagnation raises questions about the effectiveness of the rule in addressing illicit financial activity.

Germany’s Freedom of Information Act requests revealed no substantive evidence linking compliance with travel rules to reductions in money laundering, as documented by FragDenStaat. While the FOIA is designed to evaluate efficiency Anti-money laundering Programs Overall, comparing data before and after the travel rule was implemented, the response showed that German law enforcement authorities lack data on the effectiveness of anti-money laundering programs in general. This lack of central data casts doubt on the success of Al Qaeda.

Centralizing KYC data creates a single point of failure, making it a target for cyberattacks. Notable violations, e.g Equifax in 2017 and Aadhaar system in Indiaexposing sensitive information to millions, leading to identity theft and financial fraud. In high-risk jurisdictions, centralized databases present additional risks, as authoritarian regimes or criminal groups could exploit leaked data to target individuals. Sharing KYC information may expose NGO donors in high-risk areas, such as Venezuela, to similar risks, potentially compromising rather than enhancing user safety.

FATF-inspired regulations have brought about changes in how non-hosted wallets are handled. the The UK initially proposed collecting broad data on all transactions It involves non-hosted wallets but later softened its stance due to industry opposition. The UK Treasury acknowledged that requiring information for all unhosted wallet transactions would impose disproportionate burdens without clear benefits. This example shows how FATF recommendations can lead to overly intrusive measures, which could harm privacy-focused innovations, even in well-regulated markets.

Pakistan is an example of how pressure from the FATF can lead to an outright ban. The Pakistani Finance Minister recently stated that cryptocurrency “It’s never legal“Because of FATF requirements. This hard-line approach stifles business and drives legitimate financial activity underground, undermining the FATF’s stated goals of transparency and combating illicit finance.

Decentralized solutions, such as blockchain-based KYC systems, reduce single points of failure and improve privacy. Without adopting these measures, central storage will continue to put individuals at risk, especially in vulnerable areas.

Balanced approach

The scope and implementation of the travel rule remains a topic of debate. Smaller transaction exemptions, similar to those in the United States, could reduce compliance burdens while maintaining the rule’s objectives. Technological solutions such as zero-knowledge proofs may provide ways to comply with regulations while protecting user privacy.

Transparency and accountability are important to the effectiveness of the rule. Their widespread adoption will benefit from clear evidence of their impact, with independent studies and publicly available data helping to guide future policy decisions.

In its current form, the FATF Travel Rule is a cautionary tale about how well-intentioned policies can go wrong. As the debate continues, stakeholders must collaborate to ensure the future of finance remains open, inclusive and business-friendly.