Rumors abound that The European Union is considering a dire approach that could change how cryptocurrencies may interact with the real world and possibly limit the freedom and privacy of those who use them, including Bitcoin. In reality, however, European Commission draft of a broad cryptocurrency rule surprisingly targeted privacy of digital asset transactions. That represented an interesting repercussion with the earlier U.S. President Biden’s crypto order focused on transparency of crypto transactions for tax accounting purposes . It came as sort of a surprise as market participants were worrying about attempts to escalate the oversight and separation of the crypto industry from the broad banking system, which in fact wasn’t the case.

Moreover, Goldman Sachs is apparently doubling down on further growth of crypto by developing a market for crypto derivatives. The investment bank appeared to become the first major U.S. bank to trade crypto OTC, over-the-counter. More precisely, Goldman announced the creation of trades of a Bitcoin-linked derivative called a non-deliverable option with crypto merchant bank Galaxy Digital. The move is seen as a notable step in the development of crypto markets for institutional investors, in part because of the nature of OTC trades.

Back to the regulatory events in Europe: The European Commission has drafted a proposal ruling that crypto service providers would be the ones who “need to determine if a digital transaction should be accepted or rejected” every time their customers transfer crypto to an external wallet. It is unclear, however, what would be the exact criteria of such judgments and penalties for inability/unwillingness to adhere.

Pic. 1. Crypto Law Enforcement “Maslow Pyramid” as it appears now.

If this bill were to be implemented, customers would have to provide originator and beneficiary information when the exchange is processing a transaction originating from or directed to an unhosted wallet — such as a mobile wallet, a hardware wallet or a web 3.0 wallet such as Metamask.

Furthermore, as it was mentioned above, the cryptocurrency service provider was proposed to be held responsible to assess on a “risk-sensitive basis” whether the transaction in question should be rejected, suspended and whether it should be reported to enforcement authorities, without providing any further specifics.

The first expert judgements were quite vocal, saying, for example, that the legislation “could significantly violate individual financial freedom, irreparably harm the crypto economy, and stifle the future of innovation across the EU.” A lot of concerns were voiced about ordinary users being forced to trade convenience and progress for personal privacy, which is hard to deny. If this – apparently – hasty legislation to be adopted as is, it can bring a lot of damage to crypto holders’ sense of privacy and personal security, which would be compounding within next 8-10 years and slowly but surely undermining the established norms and basics, which were assumed indisputable before the digital payment era.

Excerpt: “In order to allow the authorities responsible for combating money laundering or terrorist financing in third countries to trace the source of funds or crypto-assets used for those purposes, transfers of funds or transfer of crypto- assets from the Union to outside the Union should carry complete information on the payer and the payee. Complete information on the payer and the payee should include the Legal Entity Identifier (LEI) when this information is provided by the payer to the payer’s service provider, since that would allow for better identification of the parties involved in a transfer of funds and could easily be included in existing payment message formats such as the one developed by the International Organisation for Standardisation for electronic data interchange between financial institutions.”

Again, what we see now is a raw proposal draft. There is much hope, it would serve as a call for further roundtables and wide online expert discussions, before it will include exact directions and much-needed technical details – the kind of work that will surely consume many months of joint efforts of the legislators and top market experts.