The Era of Anonymity in Digital Transfers is Over in Europe. Now What?

    Insights » EMEA » The Era of Anonymity in Digital Transfers is Over in Europe. Now What?

    With new regulations affecting the crypto market and advances in the Digital Euro initiative, authorities are seeking greater control over digital transactions. Here’s how banks and other financial institutions can leverage this trend.

    Anonymity in Digital Transfers in Europe, new regulations for the digital euro
    Mijail Popov

    Mijail Popov

    Director – EMEA Lead – Fintech and blockchain specialist

    Contact the author

    Perhaps when Satoshi Nakamoto1 introduced Bitcoin in 2009 as a decentralized, peer-to-peer digital currency, he did not anticipate that one of its defining characteristics— its anonymity—could become an issue over time. Or maybe he did. The main goal of the initiative was precisely to establish a system that ensured user privacy and transaction autonomy, free from governmental and central bank oversight. Yet, it was inevitable that sooner or later, the efforts to increase regulatory scrutiny would shed light on the risks posed by such a feature.

    A month ago, in April 2024, the crypto community was stirred by rumors that the latest European Union (EU) anti-money laundering regulations — the Anti-Money Laundering and Countering the Financing of Terrorism package (AML/CFT) — could ban anonymous cryptocurrency transactions conducted through so-called “self-custodial crypto wallets,” such as Metamask and Trust wallet. Self-custodial crypto wallets give owners total control of their cryptocurrencies and other digital assets, unlike “custodial wallets”, where institutions like banks or exchanges — e.g. Binance and Coinbase — hold the owners’ assets on their behalf.

    As it turns out, the rumors originated from a misinterpretation of the new EU laws.2 While these laws do put in place due diligence requirements like identity checks for financial entities, including crypto asset managers, they do not explicitly ban self-custodial wallets.

    As the new rules were discussed in the European Parliament, one of the measures under consideration was a EUR 1,000 cap on cryptocurrency payments from self-custodial wallets, but this provision was not included in the final text. The new regulations do impose restrictions on cash transactions, however, capping them at EUR 10,000 — which in practice renders cash transactions exceeding this value illegal within the EU.

    The direction of this new regulatory effort is crystal clear: EU authorities are convinced about the need to reduce the use of untraceable transactions, whether conducted through crypto or cash. Additionally, there seems to be a commitment to the idea that crypto will be regulated, or it won’t exist”.

    Since the adoption of the Markets in Crypto Assets (MICA) regulation in 2022, which establishes guidelines for entities operating within the EU’s crypto asset markets, there has been an evident push to regulate and increase oversight on crypto-related activities. Specifically, the EU has sought to ensure transaction traceability by strengthening identity verification protocols, due diligence procedures, and Know Your Customer (KYC) requirements, among other anti-money laundering measures.

    If we also consider the recent efforts made by the European Central Bank (ECB) to develop the Digital Euro, it is not difficult to see where the EU is heading. Essentially, authorities are striving to increase control over all forms of digital value transfers within the bloc.

    The EU’s Central Bank Digital Currency (CBDC) initiative has made significant progress recently. In November, the ECB launched the next phase of the Digital Euro project, known as the “preparation phase”, aiming to “lay the foundations” of the initiative. This phase involves “finalizing the rulebook and selecting providers to develop the platform and infrastructure”. Additionally, earlier this year, the ECB announced a $1.3 billion budget allocation for providers to work on enabling offline payments for a Digital Euro — another indication that the plans to advance the region’s CBDC are dead serious.3

    Where are the business opportunities?

    Many traditional financial institutions in Europe adopt a conservative approach to offering products and services related to blockchain and cryptocurrency. Thus, robust regulation provides them with greater comfort to develop crypto initiatives by reducing uncertainties.

    Along these lines, banks can capitalize on the fact that the era of full anonymity in crypto has ended in Europe. Many are already preparing to do so. For instance, traditional Spanish banks such as Santander, BBVA, and CaixaBank are setting up their systems to start selling crypto to their customers. The entry of such traditional players in the crypto market could mark a turning point in user adoption levels, particularly considering Europe’s highly banked population — 99% of adults in the region own a bank account.45

    As the regulatory framework advances, banks can also develop initiatives such as wallet services and multicurrency accounts that accept crypto and CBDCs. Card networks, payment processors, fintechs, and BaaS providers must stay tuned to banks’ moves in this area to adapt to their strategies, complementing their services and product offerings to better serve the demands of European users.

    Although the Digital Euro is not expected to be implemented before 2028, financial industry and digital payment players also need to be prepared to incorporate this new form of value transfer into their strategies — for instance, forming strategic partnerships to explore integration possibilities and developing technological infrastructure to support future adoption.

    Ultimately, while Europe appears to be moving towards reducing anonymity in digital transactions, this does not mean a decline in the use of crypto and other digital currencies in the region. Quite the contrary. Yet, as the use of digital currencies increase, the approval of more regulations is inevitable. Players who can adapt quickly and seize the opportunities created by such regulations will be better positioned to thrive in this market.

    Cryptocurrency Adoption in Europe (% of adult population)

    Next Steps

    The rise of digital currencies in Europe, despite the move towards reducing anonymity in transactions, presents exciting opportunities. As regulations increase, companies that can adapt quickly will be well-positioned to thrive. Stay ahead of the curve! Contact us for a comprehensive analysis of the regulatory landscape for digital currencies in Europe.


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    Sources

    1. Pseudonym for individual or group of people who created Bitcoin. ↩︎
    2. Amaka Nwaokocha, “EU scraps proposed $1K payment limit for self-custody crypto wallets,” Cointelegraph, March 2023 ↩︎
    3. Handagama, S., “European Central Bank Shows It’s Serious About Enabling Digital Euro Offline Use,” Coindesk, January 2024 ↩︎
    4. Torres A. (April 8, 2024), “Bancos españoles alistan planes para vender criptomonedas en el marco de la Ley MiCA,” BeinCrypto ↩︎
    5. World Bank Findex 2021 ↩︎

    Mijail Popov
    Mijail Popov
    mija@paymentscmi.com

    Mijail Popov is a Senior Analyst at PCMI, with nearly a decade of experience advising financial institutions, fintech companies, and startups on regulatory, business, and market insights.

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