Privacy-Enhancing Crypto Coins Could Be Banned Under Leaked EU Plans

The European Union could ban banks and crypto providers from dealing in privacy-enhancing coins such as zcash, monero and dash under a leaked draft of a money laundering bill obtained by CoinDesk.

The plans from Czech officials, who are chairing talks among EU governments on the proposed law, would represent the latest nail in the coffin for anonymous means of payment following tough new rules agreed over the summer.

“Credit institutions, financial institutions and crypto-asset service providers shall be prohibited from keeping …anonymity-enhancing coins,” said a legislative draft seen by CoinDesk, dated Nov. 9, which has been circulated to the bloc's other 26 member states for comment.

An EU diplomat told CoinDesk that the measure was intended to avoid the risk stemming from crypto assets that are specifically designed to avoid traceability. The ban on privacy coins, which prevent snooping into blockchain activity, is intended to mirror one on anonymous instruments such as bearer shares and anonymous accounts that was included in the original bill proposal.

The Czech proposal responds to a demand from countries negotiating the text, said the diplomat, who spoke on the condition of anonymity on negotiations taking place behind closed doors.

The Anti-Money Laundering Regulation was proposed in July 2021 by the European Commission as part of a package that would also forbid large cash transactions and create a new anti-money laundering agency, AMLA, to vet practices at large financial institutions.

Under the Czech plans, crypto asset providers would be obliged to verify customers' identity even for occasional transactions of under 1,000 euros ($1,040), and to probe the nature and purpose of the business for larger payments. That would make rules more onerous than for other kinds of firms such as banks, where due diligence rules only kick in for larger payments, apparently due to fears that crypto payments can easily be broken up into smaller chunks.

Crypto service providers doing business outside the EU would need to verify whether their counterparty is licensed, and verify what money laundering controls they have, the document also proposed, with details of the vetting to be set out by AMLA.

In their parallel amendments to the bill, lawmakers at the European Parliament have zeroed in on the processing of dirty money via the metaverse, decentralized finance and non-fungible tokens (NFTs). The bill must be agreed by both the Council and the European Parliament to pass into law.

If it does, it would represent the latest in a regulatory onslaught against online anonymity – which has legitimate purposes, but which regulators also worry can be used to process criminal funds, bust sanctions, or raise money for terrorists and other pariahs.

In August, the U.S. Treasury imposed sanctions on Ethereum-based privacy tool Tornado Cash, which it said was used to raise money for North Korea's weapons program — the first time sanction powers were invoked against a decentralized protocol.

The EU’s own Markets in Crypto Assets Regulation (MiCA), agreed but not yet in force, prevents exchanges from allowing the trading of anonymous crypto assets unless they’ve identified the holders. A parallel set of rules on the transfer of funds imposes extra checks on anyone handling the likes of monero or dash.

Read more: EU Seals Text of Landmark Crypto Law MiCA, Fund Transfer Rules