No. 64: A Sharp Turn Towards Crypto-Surveillance: Analyzing Implications of the EU’s Revised Transfer of Funds Regulation


  • Sabina Beleuz Neagu
Publish Date:
July 14, 2022
Publication Title:
European Union [EU] Law Working Papers
Stanford Law School
Working Paper
  • Sabina Beleuz Neagu, A Sharp Turn Towards Crypto-Surveillance: Analyzing Implications of the EU's Revised Transfer of Funds Regulation, EU Law Working Papers No. 64, Stanford-Vienna Transatlantic Technology Law Forum (2022).
Related Organization(s):


Cryptocurrencies have incited a global debate between transactors and regulators, due to their ability to enable illicit transactions to be conducted anonymously. By design, to exchange crypto-assets such as Bitcoin or Ethereum, one need not go to a bank and provide detailed personal information—nor does one necessarily need to intermediate through any centralized entity at all. Due to their automatic nature, crypto-asset payments are decentralized, completed in seconds, and difficult to block or undo, even if concerns arise. This efficiency and privacy may provide benefits to cryptocurrency issuers and transactors, but acts as a shield against regulators’ eyes, rendering anti-money laundering and know-your-customer legislation imperative for governments looking to combat financial crime or block illicit cash flows.
Though the EU has previously adopted strong anti-money laundering legislation, the covered entities in such directives have not explicitly include crypto-asset issuers or transactors. Until recently, the regulatory framework for the crypto-asset space has been formed as a patchwork, member-state-by-member-state, with little uniformity across the EU.
This year, however, on March 31st, the European Parliament’s Committee on Economic and Monetary Affairs approved provisions to Europe’s Transfer of Funds Regulation that restricts Virtual Asset Service Providers (“VASPs”) from transacting with noncustodial, unhosted wallets without verifying their owners’ identities beforehand. Among other requirements, these provisions mandate that any transactor operating through a cryptocurrency exchange provide personal identifying information and are obliged to inform AML authorities when transacting in any amounts with an unhosted wallet. The impact of this on corporate and economic activity, if adopted, would prove immediately profound.
Although the implementation of this amendment will still be negotiated with individual Member State governments via the European Commission and Council of the European Union, the fact that this regulation passed through Parliament with approval suggests a massive political shift toward a hardline stance on cryptocurrency monitoring.
The questions this thesis seeks to answer revolves around how this regulation compares to existing crypto-asset monitoring regimes and what the potential implications for companies operating in the EU that could arise from this stance. Structurally, this thesis aims to first, describe the proposed amendment and its practical impact on EU corporate and individual activity; second, compare and contrast with other similar proposed and active legislation globally; and third, classify opinions and reactions to such legislation to provide hypothesized insights into its possible real-world implications.
There exists a debate as to whether this regulation protects transactors and state financial security, or erects a wall between the decentralized and centralized realms of crypto—potentially reducing enforcement abilities. Through comparative analysis with AML/KYC crypto-regulation in the US, as well as state and corporate reactions thereto, this thesis weighs the various potential implications of this amendment—for instance, the exit of cryptocurrency activity from the EU, an increased surge of regulatory technology, and the advancement of more government-embraced centralized options, such as central bank denominated currencies (“CBDCs”) in coming years, among other possibilities. On the more critical side, corporate commentators have opined that this amendment may limit the activity of EU-based wallet providers to only allowing transfers to unhosted wallets linked to their own customers, or disallowing transfers to unhosted wallets altogether. Others suggest that since this amendment is more stringent than in the majority of global jurisdictions, it may motivate wallet holders to move away from trusted and regulated platforms that comply in the EU, exposing individuals to further risk.