The EU parliament, council and commission reached a provisional agreement on June 29 on the Transfer of Funds Regulation (TOFR). The TOFR constitutes a part of the regulatory frameworks that the EU is establishing for the regulation of cryptocurrencies.
Upon implementation, crypto asset service providers (CASPs) in the EU will be required to comply with the rules and adjust their internal policies and procedures accordingly.
The rules will take effect 18 months after the MiCA regulation is applied.
Crypto Wild West Regulation
The TOFR introduces several anti-money laundering rules that seek to collect data on cryptocurrency transactions.
in a series of tweet On the tentative deal, Ernest Utasun, an EU lawmaker, called the deal a response to the “unregulated crypto wild west.”
According to him, the TOFR rules apply to all transactions, even if they are not more than one euro. Including transactions made at crypto ATMs. Additionally, CASPs will need to collect data on non-hosted wallet transactions. This data includes transactions made and received from non-hosted wallets.
The rule further requires that the identities of non-hosted wallet owners be verified on transactions over €1,000. These rules on non-hosted wallets seem to be based on thoughts that illicit actors use them primarily to facilitate crime.
Another possible topic of controversy that could have given rise to these regulations is reports of Russia using cryptocurrencies to avoid financial sanctions. Given that as part of these rules, CASPs must adapt their operations to the economic sanctions imposed by the EU
However, the rules do not apply to peer-to-peer (P2P) transactions. Which means that by implementing TOFR rules, users who are not comfortable with data collection could migrate to P2P transactions.
The rules will also regulate the relationships of digital asset providers with CASPs in third world countries, especially where these providers are not regulated or licensed.
Speaking about the rules, the EU’s political leader Ondrej Kovarik tweeted:
The EU institutions have reached a provisional political agreement on the Transfer of Funds Regulation. I think it strikes the right balance to mitigate the risks of combating money laundering in the cryptocurrency sector without impeding innovation and overburdening companies. pic.twitter.com/k0P0I3Ah6K
— Ondřej Kovařík (@OKovarikMEP) June 29, 2022
The crypto asset provider will safeguard the data collected in the transactions and make it available to the EU.
Concerns about the TOFR rules
The EU has recently increased its efforts to implement regulatory frameworks for cryptocurrency activities. The various institutional crises recorded in the crypto market since 2022 have further intensified this need.
However, experts and analysts see the regulatory attempts as a move to stifle the use of cryptocurrencies in the EU. Concerns are also echoed that the TOFR rules constitute a violation of citizens’ right to privacy.
Instead of helping the growth of cryptocurrencies, many believe that the regulations will slow blockchain development in the EU and stifle innovation. Another potential negative impact lies in the requirement to collect data on all transactions which could make crypto exchange activities unnecessarily slow and expensive.
Also, the security of the data collected has been criticized. Many are of the opinion that pooling data with CASPs and governments could make it vulnerable to attack.
The European Agency, the European Commission and the European Banking Authority are some of the EU institutions that have come under attack in the past.