Bitcoin and privacy threatened by new EU regulation

The European Parliament recently adopted the revised anti-money laundering regulation, despite considerable opposition from the public and humanitarian groups. The Building True Change Coalition, also known as the BTC Bitcoin Coalition, has urged parliamentarians to reject proposals due to concerns about encroaching on financial freedoms and privacy. However, their efforts were unsuccessful, and a majority vote accepted the proposals.

During informal discussions, the European Commission, Parliament and Council ignored public feedback on the proposed changes. This action was seen as reducing the role of the European Parliament, the only directly elected EU body, and led to concerns about the potential for increased misuse of financial data by authoritarian regimes.

Implications and key issues

The new regulation could affect financial rules worldwide, affecting personal financial freedoms not only in the EU but worldwide. It labels privacy payment instruments and crowdfunding platforms as high risk, potentially restricting financial operations under the pretext of preventing money laundering and terrorist financing.

Crowdfunding: The AMLR categorizes all crowdfunding platforms as high-risk, which can increase operating costs, reduce the donor base and hinder efforts vital to activists and humanitarian NGOs during crises.

Financial exclusion: The new rules remove protections that helped include more people in the financial system and prevented unfair restrictions that affected immigrants, dual citizens and others who are often vulnerable. This denies them the necessary financial protection and potentially increases discrimination within the financial system.

Privacy Payment Tools: Labeling private digital wallets or self-hosted wallets as risks ignores their role in promoting financial access and supporting humanitarian efforts, potentially hindering the ability of NGOs to safely transfer funds to areas under repressive regimes.

The AMLR extends beyond the EU’s borders. The regulation sets a global financial regulatory precedent, which may have an impact on third countries. The proposal targets privacy payments and crowdfunding tools such as self-hosted wallets and mixers, and also labels them as high risk.

The day after the adoption of the AMLR, attention shifted to the activities of the Austrian Raiffeisen Bank International in Russia. MEPs have raised concerns about the bank’s plans to go ahead and expand its operations by hiring more than 2,000 new employees, highlighting a critical gap in enforcement of sanctions and AML regulations. While the AMLR targets technologies such as bitcoin wallets and mixers, larger financial institutions continue operations that may violate sanctions or facilitate money laundering.

Seth Hertlein, global head of policy at Ledger, expresses concern about the potential overreach. In a recent LinkedIn comment, Hertlein criticized the removal of section 41(a) as suggesting a shift towards monitoring individuals rather than protecting their financial freedom. He said: “The deletion of Article 41(a) is truly disgraceful and clearly demonstrates where the priorities of the member states lie. No problem with a little de-risking as long as their surveillance apparatus remains in place.”

Support for the Regulation

Proponents argue that the anti-money laundering regulation strengthens the EU’s defenses against complex global threats such as money laundering and terrorist financing. The AMLR closes loopholes that criminals exploit by regulating digital wallets and mixers.

Supporters see the AMLR as a crucial tool for combating widespread financial crimes. They see the regulation as a necessary step to protect the economic stability of the EU and beyond. Circle’s Patrick Hansen commented on the EU Parliament’s recent package approval.

Future outcomes and global influence

The adoption of the AMLR is likely to affect global financial regulation, potentially leading to increased regulatory burdens that disproportionately affect smaller entities and non-profit organizations, stifling innovation and civic engagement. Human rights and humanitarian groups worry that this regulation could signal a move toward more restrictive financial environments and attacks on privacy worldwide.

Given the importance of security and financial freedoms, a more balanced approach to financial regulation is needed to protect fundamental rights and support a more inclusive financial ecosystem that supports social and humanitarian initiatives.

Lyudmyla Kozlovska, President of the Open Dialogue Foundation and Coordinator of the BTC Coalition, presents findings from seven reports published by the Open Dialogue Foundation over the past two years. These reports expose how banks in third countries, such as Kazakhstan and Turkey, are used to launder money or evade sanctions by authoritarian regimes. ‘Dictators don’t need bitcoin wallets or mixers; they prefer established banks, especially Western banks operating in regions such as Russia, which recently contributed €800 million in taxes to the Kremlin,’ says Kozlovska.

The case of ING Bank, one of the major European banks operating in Russia, illustrates the issue of inconsistent financial regulatory enforcement. While ING has been highlighted among other EU banks for its operations in Russia, it has maintained services that raise concerns about compliance with AML and CFT laws, especially given the geopolitical tensions and economic sanctions.

It also demonstrates the wider issue of inconsistent financial regulatory enforcement. The bank suspended its services with the Open Dialogue Foundation during a politically motivated campaign against the foundation under the guise of compliance with anti-money laundering laws and the fight against the financing of terrorism, influenced by the coordinated targeting by Poland’s Law and Justice -party, the Plahotniuc and Nazarbayev regimes.

What’s next?

The scale of illegal activity involving traditional fiat currencies worldwide should also be considered for context. According to the United Nations, between $800 billion and $2 trillion is laundered annually, representing approximately 2% to 5% of global GDP. This figure demonstrates the challenges of combating financial crimes within traditional banking systems, where most money laundering still takes place. Lawmakers must balance the fight against these crimes with the need to protect fundamental financial freedoms and promote financial inclusion.

As the AMLR was introduced to influence global financial regulatory standards, its adoption is an important moment for the future of financial regulation within the EU and internationally. Members of the Parliamentary Assembly of the Council of Europe are calling for urgent reforms to ensure that the regulation does not inadvertently harm those it seeks to protect.

To mitigate these consequences, Lyudmyla Kozlovska calls on privacy advocates to engage with future MEPs about their policy proposals. “We need to educate EU policymakers about the social necessity of bitcoin payments and crowdfunding mechanisms and prevent the misuse of laws against money laundering and combating the financing of terrorism,” Kozlovska insists.

The adoption of the anti-money laundering regulation is an important moment in the EU’s efforts to combat financial crimes. However, as the regulation sets new precedents, it also raises concerns about potential overreach and the impact on privacy and financial freedom. This balance between security and freedom remains a crucial challenge, as stakeholders from across the spectrum call for a nuanced approach that supports both effective law enforcement and fundamental human rights.