With its desire to interfere with every transaction, the EC effectively dismantles the core-value of the blockchain: a system capable of securing transactions with cryptography, thereby creating trust without the need for external input. Instead, the proposed legislation would require every transaction to be double-checked by multiple AML teams under the watch of a new central financial watchdog. In essence, it sets a European agenda that is fundamentally hostile to the right to transact directly and privately on the internet. Alleged Bitcoin founder, Satoshi Nakamoto, introduced its blockchain invention stipulating that “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”. The Bitcoin blockchain was indeed conceived as an electronic payment system using on-chain cryptographic proof to combat fraud without off-chain trustworthy personal information, allowing any two parties to carry out safe, direct digital transactions.
Whereas asset ownership is ensured using ID information in the traditional banking world, the same is done using cryptographic keys in the blockchain world. As such, crypto-assets make sense only when pseudonymity is valued and guaranteed. The moment you start to share and map the identity of persons behind each wallet, you essentially know everything about them, in an unprecedented way. It is foolish to give authorities access to huge amounts of off-chain personal details that can dangerously expose the entire transaction history (e.g. current balances, and all transactions and associated counterparties) of everyone involved when cross-referenced with on-chain records. Such a vast amount of sensitive information is not needed and should never be available to anyone (including intermediaries, governments, or even hackers who will - let’s not kid ourselves - hack and abuse this. At OSOM, we have proactively raised the issue with industry associations and European privacy experts.
Another ambiguous side effect of the proposed rules is that it would create a huge divide between third party-hosted wallets and self-hosted wallets. Although public addresses would remain authorized in theory, they will be alienated in practice. Crypto users would be forced to declare the full identity of persons behind each private crypto wallet address they interact with. Such self-declarations would be practically impossible to verify in the case of self-hosted wallets. Yet, crypto exchanges could immediately be castigated if they allow such transactions to remain pseudonymous. As such, the new centralized AML requisite, would effectively cut off crypto users from each other, undermining the technology’s promise of peer-to-peer transactions. Besides, it would make it virtually impossible for any non-custodial (owning your keys) crypto account holder to liquidate their crypto assets.