EU Encryption Asset New Regulations: The End of Anonymous Transactions and a New Chapter of Regulation

In mid-January 2024, the European Union, as the first major jurisdiction in the world to establish a comprehensive encryption regulatory framework, proposed again to introduce strict restrictions on cryptocurrency transfers and private wallets in its anti-money laundering regulatory rules. These restrictions include limiting anonymous transactions and increasing the KYC obligations of platforms.

On March 23, the European Parliament and Council officially put this concept into practice by launching the latest anti-money laundering "unboxing order". This new regulation aims to eliminate the anonymity of cryptocurrency transactions to regulate activities such as money laundering, tax evasion, and the use of encryption assets to evade regulatory asset transfers.

Core Content of New Regulations

1. The use of any unidentified self-custody encryption wallets for cryptocurrency payments of any scale is prohibited within the jurisdiction of the European Union.
2. Cryptocurrency companies are required to conduct due diligence on transactions exceeding 1000 euros.

This regulation mainly targets encryption currency users and encryption currency service providers ( VASP ).

The Impact of New Regulations

The new regulations have a dual impact on the cryptocurrency industry. On the positive side, they align with the previous MiCA legislation and the rules for the collection of transfer information, helping to maximize regulation against cryptocurrency-related crimes, while laying the groundwork for potential future taxation policies on crypto assets. However, the negative aspect is that it directly undermines one of the core features of cryptocurrency—anonymity, which may destabilize the financial ecosystem built on the decentralized characteristics of blockchain.

It is worth noting that the tightening of anti-money laundering laws this time is not limited to encryption assets, but also involves other tools and channels that may be used for money laundering. For example, the use of non-public cash payments exceeding 3000 euros in commercial transactions is prohibited, and cash transactions over 10000 euros are completely banned. Industries such as luxury goods and professional football will also face stricter regulations.

Impact on the encryption asset industry

The EU's regulatory trend may have a demonstration effect on the global encryption asset industry. From a positive perspective, the "open box order" does not completely prohibit cryptocurrency, but rather requires its use and investment in a regulated environment, which is more flexible than a total ban.

However, this regulation also brings challenges. It may affect users' rights to freely dispose of their assets and allow traditional centralized regulatory powers to enter the encryption asset community. This could lead some users to turn to other unregulated encryption assets, while VASPs may face the dual pressure of heavy KYC obligations and user attrition.

Impact on Other Encryption Assets

Currently, the "Opening Box Order" primarily targets cryptocurrency trading and does not clearly cover other encryption assets such as NFTs, DeFi, and GameFi. This may be because the market size of these assets is relatively small and they have not yet become major money laundering tools, while the EU also maintains a cautious approach to regulating emerging technologies.

Outlook

Although the "Box Opening Order" will officially take effect in three years, the EU has actually already prohibited the use of self-custody wallets for anonymous encryption payments. Opinions in the industry vary on this, with some believing it may violate fundamental civil rights and the environment of free competition.

Although there is still controversy regarding the effectiveness and necessity of the "box-opening order", the EU's attempt as the first jurisdiction to systematically regulate encryption assets is undoubtedly worthy of attention. In the future, the actual effects of this policy will be the key basis for assessing its pros and cons.