Non-custodial Wallets Will Not Face EU Ban

• Non-custodial wallets will no longer face a potential ban in the EU
• The potential for outlawing anonymous wallets has hovered in the background for the past two years
• The European Commission seems to have come up with a compromise that means non-custodial wallets will not be banned

Crypto users in the EU will breathe a sigh of relief after it was revealed that EU commissioners ended their plan to ban non-custodial wallets. The banning of non-custodial wallets has been a topic of much debate with EU politicians, who want to tread a fine line between reducing the potential for criminal activity and not stifling innovation, but a wording change in the latest anti-money laundering bill shows that it may have found a way forward.

Two Year Battle Continues

The suggestion of banning anonymous crypto wallets was first put forward by the European Commission in July 2021 as part of a raft of new changes brought in to honor the AMLD5 regulations. The new regulations called for the collection of personal details of both parties in any cryptocurrency transaction, which obviously is impossible with a self-hosted wallet. This was included in the Transfer of Funds Regulation (TFR) which was voted on in March last year, but thankfully didn’t pass, although a host of other requirements were laid down.

The upshot of the EU’s failure to implement a ban on non-custodial wallets has prompted a rethink from the European Commission on how to deal with the issue of anonymous crypto transactions, and a wording change in the European Parliament’s review of its anti-money laundering bill shows the direction it is going in. When the subject first arose, the term used was ‘unhosted wallets’, but this was changed to ‘self-hosted wallets’ during the discussions last year.

Self-hosted Addresses Now the Preferred Term

However, we now have a new term – ‘self-hosted addresses’ – with policymakers aiming to clarify their objective of preventing non-custodial wallets from being created without being linked to a personally identified account, such as a cryptocurrency exchange. The previous terminology could have implied that crypto service providers in the EU would have been prohibited from providing non-custodial services all together, which is not the EU Commission’s aim.

As part of the TFR, self-hosted wallets will still be subject to a single transaction limit of €1,000 ($1,070) before they must be tied to an identity, while privacy-enhancing cryptocurrencies and “anonymizing instruments,” including privacy wallets or crypto mixers, may be prohibited under the new proposals.

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