Europe Targets Self-Hosted Bitcoin Wallets—and Financial Privacy

Inflation and economic disruption are increasing around the globe, so supposedly stable governments want to tighten controls on cryptocurrency. States loathe “unhosted wallets”, which is cryptocurrency completely owned by individuals and not a controlled business.

European Union has taken steps to ban self-hosted cryptocurrency wallets. They propose that businesses keep records on all people who pay cash. This is a shocking increase in surveillance of financial transactions and an unjustified attack on privacy.

In late March, the EU Parliament’s Committee on Economic and Monetary Affairs approved a new rule to the existing Transfer of Funds Regulation that would prevent regulated entities (service providers like exchanges) from interacting with self-managed wallets, propagandistically referred to as “unhosted,” without first undertaking invasive “know-your-customer” data collection. It will be up for legislative approval later in the year. After that, it may become effective within 9 to 18 months.

According to EU rules, these regulations will ensure that crypto-assets are traceable in the same way traditional money transfers. Cryptocurrency transactions are not. Already CanTransfers to bank accounts can also be traced. These rules are far more than the status quo.

In general, these anti-money-laundering and data collection regulations only apply to transactions which are managed by authorized entities. For example, if you transfer large amounts of money between two banks, each bank will have the information you provide. Governments make these banks collect and keep this information to try to crack down on financial crime—even though this system of financial surveillance is highly ineffective.

However, these rules are not applicable to all cash transactions. If someone wishes to make a cash payment, they are not obliged to retain this information. Although governments would love this information, they have been prevented from doing so for several reasons.

It’s simply not possible. Because they need the information to make the transfer, financial institutions have to maintain financial records. Cash transactions are not exempt from this requirement.

It would then be noticeably intrusive. It is because financial surveillance works so seamlessly that it can be so subtle. Without much notice or comment, government agencies have taken over everyday commercial activity to extract rich data. This quiet system for financial surveillance might be more apparent if it was required that we take down the information each time we use cash. We might start asking questions.

EU realized that “unhosted” bitcoin wallets were one method to increase surveillance. A relative small number of people have access to cryptocurrency. Even fewer still store their keys or host their wallets. These controls can be imposed by governments today to prevent sovereign transactions from being accessed in the future, when more people may use cryptocurrency.

It isn’t necessarily that compliance for regulatory exchanges would be straightforward. Transactions in cryptocurrency can become complicated due to the involvement of many people and countries. Some inputs may have a harder provenance than others. Others may not want to transact with the European Union, or they might be unwilling.

Some exchanges might decide not to do business with self-hosted wallets. Although this would not prohibit self-hosting it would severely limit the cryptocurrency economy for those who want to keep their keys private.

It is most likely true. Take the protest of a Canadian trucker. Individuals could receive funds via a wallet hosted by the government. However, it was able to and did support regulated entities in cutting off funds to protest-related wallets. It is an attempt to exert as much control as possible against cryptocurrency.

It’s not just a matter of Europe going wild. The United States tried to take down self-hosted bitcoin wallets in the past through Treasury rulemaking. The Department of Justice considers using sovereign cryptocurrency methods to be an “high-risk” activity. Financial Action Task Force (a body that sets global standards for financial surveillance rules) is opposed to self-hosting.

Critics of Bitcoin point out rules such as these and claim that technology cannot be used to achieve financial sovereignty. They claim that governments will simply crack down on freedom tools, and you should not bother to learn enough about them to be able use them effectively at all.

These rules will only be applied to already-regulated entities and not individuals hosting their data or money. These individuals cannot be effectively targeted.

They know that cryptocurrencies impose limits on the level of their financial control. They are keen to tighten their grip on them before financial privacy technologies grow further. They are limited to adding rules that apply only to entities who already adhere to their rules.

Governments will therefore be unable to stop many motivated and capable users of financial privacy tools like self-hosting or good address hygiene.

We have time right now to use the existing bridges between crypto and fiat currencies in order to find out about these tools, and then prepare. This will make it less likely that existing government controls over centralized platforms are effective.

Inflation, financial surveillance and scarcity continue to be a major problem. This will make it more urgent for countries to have a stable and reliable currency and payment system that is free of government interference. It is possible to expect that governments will target cryptocurrency even more, as they struggle for control.  Liberty-minded people have the time and tools to preserve their values through these financial freedom technologies.