United Kingdom: No Need to Spy on Unhosted Wallets

United Kingdom officials announced Monday that they would not require cryptocurrency providers to aid them in finding personal details on the owners of unhosted wallets.

“The government has modified its proposals with regard to unhosted wallets,” Treasury officials said in a document on rules related to “money laundering, terrorist financing and transfer of funds.” The document said regulators did not “agree that unhosted wallet transactions should automatically be viewed as higher risk,” noting, “many persons who hold cryptoassets for legitimate purposes use unhosted wallets due to their customisability and potential security advantages (e.g. cold wallet storage), and there is not good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.”

They added: “Instead of requiring the collection of beneficiary and originator information for all unhosted wallet transfers, cryptoasset businesses will only be expected to collect this information for transactions identified as posing an elevated risk of illicit finance,” the document added.

“Unhosted wallets” refer to any platform that enables users to control their own funds without using an exchange as an intermediary — such as MetaMask or Ledger. Self-hosted wallets have become particularly popular amid this month’s meltdown of centralized exchanges, including Celsius, which announced last week that it was seizing users’ funds as part of an uphill battle to remain solvent.

The ruling contradicts a proposal the European Union’s committees on Economic and Monetary Affairs (ECON) and Civil Liberties (LIBE) passed in March — by a 93-14 vote — requiring cryptocurrency service providers to collect information about any wallets with which they interact that have conducted transactions valued at more than 1,000 euros ($1,050). The rule still needs to pass the full Parliament, but is not expected to face significant opposition.

Coinbase CEO Brian Armstrong, whose company said in a May regulatory filing that federal law suggested it may be forced to seize user funds in the event it suffered bankruptcy, excoriated the EU proposal in March, writing on Twitter at the time, “This means before you can send or receive crypto from a self-hosted wallet, Coinbase will be required to collect, store, and verify information on the other party, which is not our customer, before the transfer is allowed.”

“Moreover, any time you receive 1,000 euros or more in crypto from a self-hosted wallet, Coinbase will be required to report you to the authorities,” Armstrong said. “This applies even if there is no indication of suspicious activity.”

The U.S. passed quietly passed a similar provision in November in infrastructure legislation signed by President Joe Biden. That law, which is scheduled to take effect in 2024, would require Americans to gather details including Social Security numbers from the owners of any wallets that send them cryptocurrency, and to report the information to the Internal Revenue Service.

The nonprofit Coin Center filed suit this month to stop that law on grounds that it violated the Fourth Amendment’s prohibition on unreasonable searches and seizures, pointing out that it would give the feds a “comprehensive database” of transactions and provide “an unprecedented level of detail about transactions within a realm where users have taken a series of steps to protect their transactional privacy.”