Government authorities around the globe have been restructuring regulation rules after seeing excessive market volatility following the Terra collapse.
Similarly, while updating money laundering rules, the United Kingdom’s HM Treasury decided to reverse its plans to impose Know-Your-Customer (KYC) restrictions on the non-custodial crypto wallets, also known as private wallets. KYC protocols are used to collect information from the cryptocurrency sender to recognize the original source of crypto funds and prevent money laundering and terror financing.
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The proposed regulation rules will go into effect in September 2022 if parliament approves.
As per the newly published report of the HM Treasury, KYC implementation on the non-hosted wallets looks unnecessary. The report reads;
The government does not agree that unhosted wallet transactions should automatically be viewed as higher risk; many persons who hold crypto assets for legitimate purposes use unhosted wallets due to their customizability and potential security advantages (e.g., cold wallet storage), and there is no good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.
In line with the previously imposed regulation for money laundering, the Treasury encircled the crypto transfers under the Financial Action Task Force (FATF), which required both sender and receiver to submit their information to the crypto exchanges for better tracking of the funds. Besides, it implied short and long-term costs.
Indeed, it was frustrating for legitimate institutions to fulfill users’ information at the time of each transfer.
Nevertheless, the UK’s authority has reversed its decision after consultation with the key players in the industry. It includes government agencies, industry tycoons and academics, and others. A few participants urged that imposing travel rules for everyone increases cost. While some suggested implementing zero-knowledge proof technology instead, as it prevents one from sharing personal information by demonstrating “customer due diligence checks had been performed.”
In agreeing that regulation rules emphasize cost, the UK Treasury highlighted its overall benefits in response to the consultants’ comments. The authority has dropped its plan of collecting information on institutional transfers or non-hosted wallets being used for legitimate purposes. Instead, it requires only crypto businesses to submit information for “transactions identified as posing an elevated risk of illicit finance.”
The rule is being eased so that fiat and crypto transfers will no longer have to follow the de minimis threshold. In addition, information requirements on unhosted wallets will only be required when it is needed on a risk-sensitive basis.
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For instance, unlike the UK, the EU has previously favored regulations affecting non-hosted wallets. As a result, the criticism from the crypto community came to bear. Users have lamented that this move will potentially affect privacy.
Featured image from Pixabay and chart from TradingView.com
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