Members of the European Parliament have approved a controversial regulation that could undermine the decentralized finance (defi) sector in the EU. Some provisions of the regulation, which have yet to be coordinated by other European institutions, are intended to introduce restrictions on transactions involving private crypto wallets.

EU Parliament Moves To Introduce Verification For Defi Wallets

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) supported on Thursday the Transfer of Funds Regulation (TFR). The TFR, among other provisions, requires crypto service providers to implement strict anti-money laundering measures regarding cryptocurrency transactions to and from ‘unhosted” wallets.

The majority of ECON members supported the text that requires crypto platforms keep, verify and share transaction data to financial authorities. According to a report by the German crypto news outlet BTC Echo, the procedures apply to transfers of amounts from EUR1,000, but a press release noted that as crypto transactions often circumvent threshold-based rules, “the MEPs decided therefore to remove minimum thresholds and exemptions for low-value transfers.”

The TFR will require that all crypto transfers include information about the source and recipient of the assets. Drafters want to make sure that suspicious transactions can be tracked down and blocked. The Parliament’s press office noted that the rules do not apply to person–to–person transfers, such as those between providers, like bitcoins trading platforms, and among providers acting for their own benefit.

Also, crypto transaction processors will be able stop transactions originating from non-compliant sources or being sent to them. This is according to another provision that was also supported. The Civil Liberties, Justice and Home Affairs committee also approved the regulation. The official announcement suggesting that the new rules are designed to stop illicit flows in the EU provided the lawmakers’ main motive noting:

Crypto-assets’ transfers would need to be traced and identified to prevent their use in money laundering, terrorist financing, and other crimes.

TFR Decision Viewed as a Setback by Industry for Europe’s Crypto Space

If it is not challenged, the draft moves to the trilogue stage. This is the next phase of the EU’s legislative process. During which time it must be agreed upon by the European Commission, and the Council of the European Union. The institutions are also discussing the Markets in Crypto Assets (MiCA) framework proposal, which recently advanced without its own controversial text that would have effectively prohibited proof-of-work (PoW) currencies like bitcoin.

Just like the PoW ban the TFR paragraphs sparked adverse reactions from the Old Continent’s crypto community. Peter Grosskopf, cofounder of Unstoppable Finance, stated that the obligation to verify unhosted wallets would not only be a serious invasion on people’s privacy but also have serious implications for Europe’s defi ecosystem.

Industry Watchers consider these regulations as an attempt to ban unhosted accounts and limit the defi industry. They also warn that Europe’s future prospects as a destination for crypto currencies are in jeopardy. Many companies operating in the crypto industry would be severely restricted by the new rules. Grosskopf called the decision a “huge financial, social and economic setback for defi space .”

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Do you expect the institutions in Brussels to adopt the strict crypto regulations? Let us know in the comments below.

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