The central theses
- The UK is backing away from its blanket requirement for crypto firms to submit personal information on all transfers to non-hosted wallets.
- The Treasury Department’s report confirmed the industry’s privacy concerns.
- The UK’s stance differs from the EU, which decided in March to ban transfers to anonymous wallets.
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The UK Treasury has decided to lift its requirement for crypto companies to compile the personal details of self-custodial wallet users, citing privacy concerns.
Unhosted wallets for “legitimate purposes”
The UK government will not require crypto companies to collect personally identifiable information for all transfers to non-custodial wallets.
In his June report, the Treasury Department acknowledged that “many individuals who hold cryptoassets for legitimate purposes use non-hosted wallets” and that no “good evidence” shows that such wallets are disproportionately used for criminal activity. As such, crypto companies are only expected to collect personally identifiable information for “transactions that have been identified as having an increased risk of illicit finance.”
The decision was made based on feedback the Treasury received from its consultation with regulators, industry leaders, academia, civil society and government agencies on the topic of updating money laundering regulations.
The Treasury Department had previously indicated that crypto transfers would fall under Financial Action Task Force (FATF) standards, meaning that both the originator and the recipient of the funds transferred would need to be identified by crypto firms.
The action was discontinued due to concerns about privacy, feasibility, and short- and long-term costs. Some respondents suggested using zero-knowledge proof technology to “demonstrate that customer due diligence has been performed” while avoiding the disclosure of personal data.
The recommendations in the Ministry of Finance’s report will be implemented after parliamentary approval in September 2022.
Anti-anonymity legislation was passed in several legislative bodies this year, including the European Parliament tuned to ban anonymous crypto transactions in March. Lithuania’s government also recently imposed a blanket ban on “anonymous wallets.”
Disclosure: At the time of writing this article, the author of this article owned ETH and several other cryptocurrencies.