The Transfer of Funds Regulation (TFR) – The End for Decentralized Finance (DeFi) for Crypto Currencies in Europe?

The Transfer of Funds Regulation (TFR) – The End for Decentralized Finance (DeFi) for Crypto Currencies in Europe?


On March 31, 2022, the European Parliament (EU Parliament) voted on the Transfer of Funds Regulations (TRF). The European TRF regulation is an anti-money laundering and counter-terrorist financing regulation designed to ensure that European Crypto Assets Service Providers (CASPs) pass on information about the originator and recipient of a payment and, if necessary, suspend or reject payment transactions if information is either incorrect, non-existent or incomplete. The aim of TFR regulation is to make it easier to identify, prevent and report criminal transactions for money laundering and terrorist financing. Some very similar customer identification (KYC) rules are already known from traditional finance.

It implements a recommendation of the Financial Action Task Force (FATF), the global supervisory authority for money laundering. Although the FATF does not have the power to issue binding legislation, its recommendations have a very strong impact on national legal systems. Their goal is to develop a similar regulation to that for electronic payments, which must share personal data of their customers for transactions among themselves.

What is the proposed change in the TFR for cryptocurrencies?

CASPs must identify and verify the individuals behind so-called “unhosted wallets” or also referred to as “non-custodial wallets” before allowing a transaction. Unhosted wallets are crypto accounts that are not maintained by a custodial service provider, such as centralized exchanges like Binance or Coinbase. It is not entirely clear how this would work, as the owners of non-unhosted wallets are likely not customers of CASP, which would amount to an indirect ban on unhosted wallets.

A ban on unhosted wallets would significantly restrict Decentralized Finance (Defi) in the EU. Crypto associations call the EU regulation for unhosted wallets a threatening brake on innovation, as it could lead to “considerable bureaucratic difficulties and high compliance risks”. It is feared that European crypto startups and crypto companies could migrate to Switzerland, the UK or the USA.

The UK, for example, announced in a press release dated April 04, 2022, that the goal is to “make the UK a global center for crypto asset technology.” To this end, stablecoins, for example, are to be “brought into regulation to pave the way for their use in the UK as a recognized means of payment.” This is a decisive change of direction in crypto for the UK because a few weeks ago, the country had enacted even tougher regulations for crypto advertising.

Thus, the UK could create the conditions to absorb potential migrating crypto companies from Europe.

What do CASPs need to report?

CASPs must report all transactions over EUR 1,000 received by their customers from non-unhosted wallets. This would generally have to be reported without the need for a suspicious transaction check by the CASP.

What are the concerns with the proposed TFR regulation?

One point of criticism is the threshold of EUR 1,000 for transactions with unhosted wallets.

The European associations propose to increase the value of transactions to EUR 10,000. Thus, the transaction limit for unhosted wallets and thus for DeFi transactions would be the same as for transactions in the traditional financial industry to combat money laundering and terrorist financing.

What happens next?

If the previous draft is not being challenged, it will go to the trilogue with the EU Commission and the Council (member states). Negotiations would continue there. Hopes are likely to rest on a DeFi ban being rejected in the further talks.
A final decision, i.e. a vote in the EU Parliament and Council, is expected in mid-June 2022.

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