How to make make crypto-asset transfers traceable?

How to make make crypto-asset transfers traceable?

The European Union has adopted new rules to enhance the traceability of crypto-asset transfers, aimed at preventing their misuse for money laundering.

The rules require crypto asset service providers to collect and share information about the sender and beneficiary of crypto transactions, irrespective of the amount involved.

This move is part of a broader legislative effort to strengthen the EU’s anti-money laundering and terrorism financing measures, initiated in July 2021.

The formal adoption of these rules marks the conclusion of the legislative process that began with the proposal’s presentation and underwent trilogue negotiations.

The European Parliament approved two key pieces of legislation for crypto-assets:

Tracing Transfers of Crypto-Assets: With 529 votes in favor, this legislation aims to ensure traceability of crypto transfers, similar to traditional finance. The ‚travel rule‘ requires information on the asset’s source and beneficiary to accompany transactions. It applies to transactions over €1000 involving self-hosted wallets interacting with service provider-managed wallets, but not to private person-to-person transfers.
Uniform Market Rules (MiCA): Passed with 517 votes in favor, MiCA establishes rules for supervision, consumer protection, and environmental impact in the crypto-assets market. It covers crypto-assets outside existing financial regulations, requiring transparency and disclosures to protect against market manipulation and financial crime. Service providers must also disclose their energy consumption.

The measures, intended to enhance market integrity and combat financial crimes, will be formally endorsed by the Council and published, becoming effective 20 days later. This legislation aligns with citizens‘ expectations for blockchain technology safeguards, set during the Conference on the Future of Europe.

Regulation (EU) 2023/1113 on information accompanying transfers of funds and certain crypto-assets and amending Directive (EU) 2015/849

The Regulation (EU) 2023/1113 aims to enhance transparency and prevent criminal activities in crypto-asset transfers. Key points include:

Recasting Regulation (EU) 2015/847 for clarity and to include crypto-assets.
Ensuring FATF Compliance: Aligning with FATF standards for virtual asset service providers to facilitate traceability.
Expanding Regulatory Scope: Including virtual assets in addition to traditional funds.
Combatting Illicit Money Flows: Addressing money laundering, terrorist financing, and organized crime at the EU level.
Uniform Application of FATF Recommendations: Ensuring consistent application across EU states.
Global Approach: Promoting global application of standards to manage risks associated with virtual assets.
Coherent Definitions: Aligning definitions of crypto-assets and related services with FATF standards.
Targeted and Proportionate Regulation: Avoiding unnecessary burdens while ensuring free capital movement.
Enhancing Traceability: Requiring detailed information on payers and payees for both fund and crypto-asset transfers.
Addressing High-Risk Transfers: Focusing on anonymity-enhancing technologies like privacy wallets and mixers.
Data Protection Compliance: Ensuring personal data processing aligns with EU data protection regulations.
Exclusions from Regulation: Certain types of transfers and entities are not covered under this regulation.
Regulating Crypto-ATMs: Addressing the money laundering and terrorist financing risks posed by crypto-ATMs.
Emphasizing Cross-Jurisdictional Cooperation: Encouraging collaboration among member states and third countries in combating money laundering and terrorist financing.

Overall, the regulation seeks to provide a comprehensive framework for monitoring and regulating crypto-asset transfers within the EU, enhancing security and transparency while aligning with international standards.

Management summary – Regulation (EU) 2023/1113

Chapter I: Subject Matter, Scope, and Definitions
- Establishes the Regulation’s purpose, covering rules on information for fund and crypto-asset transfers to prevent money laundering and terrorist financing. Defines key terms like ‚payer‘, ‚payee‘, and ‚crypto-asset‘.
Chapter II: Obligations on Payment Service Providers
- Details responsibilities of payment service providers in ensuring transfers of funds are accompanied by accurate payer and payee information.
Chapter III: Obligations on Crypto-Asset Service Providers
- Similar to Chapter II, it outlines obligations for crypto-asset service providers to ensure correct information accompanies crypto-asset transfers.
Chapter IV: Common Measures Applicable by Payment and Crypto-Asset Service Providers
- Describes general measures both service provider types must follow, including implementing internal policies and controls.
Chapter V: Information, Data Protection, and Record-Retention
- Focuses on data protection, confidentiality, and the retention period for records related to fund and crypto-asset transfers.
Chapter VI: Sanctions and Monitoring
- Covers administrative sanctions and measures for non-compliance with the Regulation, reporting of breaches, and monitoring compliance.
Chapter VII: Implementing Powers
- Details the Committee procedure for assisting the Commission in implementing the Regulation.
Chapter VIII – Derogations
- Outlines conditions under which EU Member States can agree with non-EU countries or territories on certain exceptions to the Regulation, especially in cases of shared monetary unions or similar financial arrangements.
Chapter IX – Other Provisions
- Requires the European Banking Authority (EBA) to issue guidelines for implementing specific parts of the Regulation, both for payment service providers and crypto-asset service providers, and sets a schedule for reviewing the Regulation’s effectiveness.
Chapter X – Final Provisions
- Details amendments to Directive (EU) 2015/849, the repeal of Regulation (EU) 2015/847, and the effective date and direct applicability of this Regulation in all EU Member States.

Table of contents – Regulation (EU) 2023/1113

CHAPTER I – Subject matter, scope and definitions
Article 1 – Subject matter
Article 2 – Scope
Article 3 – Definitions
CHAPTER II – Obligations on payment service providers
Section 1 – Obligations on the payment service provider of the payer
Section 2 – Obligations on the payment service provider of the payee
Section 3 – Obligations on intermediary payment service providers
CHAPTER III – Obligations on crypto-asset service providers
Section 1 – Obligations on the crypto-asset service provider of the originator
Section 2 – Obligations on the crypto-asset service provider of the beneficiary
Section 3 – Obligations on intermediary crypto-asset service providers
CHAPTER IV – Common measures applicable by payment service providers and crypto-asset service providers
Article 23 – Internal policies, procedures and controls to ensure implementation of restrictive measures
CHAPTER V – Information, data protection and record-retention
Article 24 – Provision of information
Article 25 – Data protection
Article 26 – Record retention
Article 27 – Cooperation among competent authorities
CHAPTER VI – Sanctions and monitoring
Article 28 – Administrative sanctions and measures
Article 29 – Specific provisions
Article 30 – Publication of sanctions and measures
Article 31 – Application of sanctions and measures by competent authorities
Article 32 – Reporting of breaches
Article 33 – Monitoring
CHAPTER VII – Implementing powers
Article 34 – Committee procedure
CHAPTER VIII – Derogations
Article 35 – Agreements with countries and territories which do not form part of the territory of the Union
CHAPTER IX – Other provisions
Article 36 – Guidelines
Article 37 – Review
CHAPTER X – Final provisions
Article 38 – Amendments to Directive (EU) 2015/849
Article 19a
Article 19b
Article 24a
Article 39 – Repeal
Article 40 – Entry into force
ANNEX I
ANNEX II