EU steps up surveillance and imposes end to crypto anonymity in Europe

The European Union is moving towards monitoring cryptocurrency transfers. With its new anti-money laundering rules, the EU wants to trace all crypto transactions, threatening one of the founding principles of blockchain technology, confidentiality.

The EU continues its charge against the confidentiality of crypto transactions

The anonymous nature of the crypto-currency sector appears to be under legislative threat from member countries of the European Union. According to recent statements from Paschal Donohoe, President of the Eurogroupthe EU is now planning to apply its anti-money laundering (AML) regulations to the crypto sector, with particularly stringent measures.

In this new measure, the EU wants to “record data on senders and recipients of funds” for all transactions passing through crypto service providers. Isn’t an entire doctrine under threat?

For Donohoe this extension is “essential” to move regulation “beyond more traditional forms of financial transfer” and enable “transparency of crypto asset transfers”. Yet this desire for oversight is also intended to limit the use of so-called “non-custody” crypto wallets.

In concrete terms, from July 1, 2027, the new anti-money laundering regulations will (AMLR) prohibit crypto service providers from offering or interacting with anonymous wallets and privacy-oriented cryptocurrencies, such as Monero. Exchange platforms and other centralized entities will have to identify users of self-hosted wallets using their services.

The new rule requires EU member states to guarantee direct, immediate and unfiltered access to crypto account data for various government agencies, including financial intelligence units and the European Anti-Money Laundering Authority.

MiCA and AMLR, a regulatory arsenal to combat anonymity

This new regulation is not an isolated one in the EU. It perhaps completes the mission already begun by the regulation MiCA (Markets in Crypto Assets), which comes into force on December 30, 2024. Presented as a regulatory revolution, MiCA was initially intended to better protect investors after scandals such as the collapse of Terra Luna and FTX.

However, the regulatory arsenal MiCA and AMLR ultimately goes far beyond simple consumer protection. Crypto companies now known as CASP – Crypto-Asset Service Providers must then comply with strict “good conduct”, governance and conflict of interest management obligations, while maintaining substantial capital requirements.

These regulations call into question the confidentiality that has always been a pillar within the crypto ecosystem. The obligation to create a user database (KYC) and the systematic tracking of transactions over €1,000 between a customer account and a self-held wallet represent, according to critics, an intrusion into the financial privacy of Europeans. Is the individual freedom of private property also under attack?

A regulation that risks creating a legal upheaval

Privacy advocates obviously cannot support this type of regulation. For Riccardo Spagni, Monero developer, these provisions are clearly “biased in favour of surveillance”.. In particular, he points out that the ban on “anonymity-enhanced” cryptocurrencies goes far beyond the risk-based approach normally applied to cash, prepaid cards or even end-to-end encrypted messaging.

Spagni has highlighted a fundamental contradiction between AMLR and Articles 7 and 8 of the EU Charter, which guarantee privacy and data protection respectively. This contradiction could, in his view, lead to inevitable legal challenges.

The effectiveness argument is also challenged. Spagni points out that “criminals can always compile the open source code of Monero and exchange it peer-to-peer or via offshore platforms.

In reality, these rules could simply deprive law-abiding Europeans of a digital currency equivalent that protects them from data collection, harassment or commercial espionage.

As Europe strengthens its regulatory framework, the U.S. seems to be moving in the opposite direction driven by Donald Trump. There is therefore a real risk that the European continent will lose its competitiveness in this area to other, more welcoming jurisdictions.

The preservation of fundamental freedoms promised by the crypto ecosystem now seems more fragile than ever in Europe. The battle to protect the foundations of the crypto ecosystem is likely to be all the more intense given the contrast with the American approach. After the regulatory crusade registered in the United States under Biden with Gary Gensler head of the SEC The change of course in the US makes the European approach even more isolated.