This has been talked about for some time, and at the end of June, important news emerged from the European Union, which regulated anti-money laundering (AML) regulations for cryptocurrencies that will oblige companies to verify the identity of clients.

This is a temporary draft to update the existing AML rules for cryptocurrency service providers and originates from the ‘travel rule’ already used in traditional finance; i.e. it will oblige exchanges to collect information on both the sender and the recipient of cryptocurrency transactions.

This rule demands that information on the asset’s origin and its beneficiary travel with the transaction and be stored on both sides of the transfer.

Cryptocurrency service providers (CASPs) will be obliged to provide this information to the relevant authorities if an investigation into money laundering and terrorist financing is conducted.

The European Council stated that the move is aimed at

“make it more difficult for criminals to misuse cryptocurrencies for criminal purposes” and “will ensure the traceability of crypto-asset transfers”.

Unlike in the UK, which recently excluded so-called ‘unhosted wallets’ – i.e. those outside traditional centralised exchanges or brokers. – from the tracking of crypto transactions, the European regulation should include them, which for many will prove to be a damaging measure that could hinder the development of the sector in Europe.

The update is in line with the Financial Action Task Force (FATF) recommendations to reduce the risk of money laundering and terrorist financing globally and in particular decisive influence can be found in the 15th and 16th recommendations and the need to protect investors and consumers by maintaining the financial integrity of the markets.

Decisive impetus for ‘swift and effective’ regulation comes from Russia’s invasion of Ukraine, as it is feared that Russia may use cryptocurrencies to circumvent sanctions.