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19th July 2022 > > EU regulation.


The Transfer of Funds Regulation could have been thought through rather better.

Market Snap (at time of writing)

Market Wrap

Technical analysis (TA) is utter tosh and rot in my opinion.

Proponents claim it is forward-looking when in fact it is the absolute reverse. However, I willingly admit that this is a fairly lonely stance to take, and that the actions of techies can influence price action in the short term, subject to market fundamentals and news flow.

One of the key metrics techies look at is the 200-week moving average (WMA), though no-one has explained to me why that is any more relevant than the 198.5 WMA or indeed the 210 WMA plus a few days or so.

I am reliably informed that current 200 WMA (which changes as historical data moves out of the range) is pitched as $22.5k give or take. Across all centralised exchanges, sell orders are stacked around this level as techies believe it is a key resistance level. That belief is self-reinforcing, and undoubtedly the sheer number of sell orders at that level makes it difficult to breach in the absence of market-moving news.

The corollary of that is that if the 200 WMA is breached, all the techies get in a spin, and start saying that $22.5k has now “flipped” to support, and bids start stacking up there. Again, this belief is self-reinforcing giving the naïve and the innocent bystander the illusion that resistance and support levels actually exist as anything other than almost religious adherence to a few squiggles on a graph.

Curious Cryptos’ Commentary – Transfer of Funds Regulation

Regular readers were surprised and delighted at the Markets in Crypto Assets legislation currently going through the trilogue, a process of discussion between the European Commission, the European Parliament, and the Council of the European Union.

Except for a failed attempt – at least for now - to add a “ban” on PoW (proof-of work) coins, this legislation appears well designed to achieve its stated objectives to “facilitate the competitiveness and innovation of the financial sector in the European Union, to establish Europe as a global standard setter and to provide consumer protection for digital finance and modern payments.”

But never underestimate bureaucrats’ innate abilities to balls things up.

A separate piece of legislation, known as the “Transfer of Funds Regulation” is also currently subject to the trilogue. Informally known as the “travel rules”, this regulation is aimed at the transfer of crypto funds between centralised exchanges, self-hosting wallets such as MetaMask, and unhosted wallets (that will be your Ledger Nano X).

The main points – with thanks to CoinTelegraph - are as follows:

1) All crypto asset transfers will have to be linked to a real identity, regardless of value (zero-threshold traceability).

2) Service providers involving crypto assets — which the European legislation call Virtual Asset Service Providers, or VASPs — will have to collect information about the issuer and the beneficiary of the transfers they execute.

3) All companies providing crypto-related services in any EU member state will become obliged entities under the existing AML directive.

4) Unhosted wallets will be impacted by the rules because VASPs will be required to collect and store information about their customers' transfers.

5) Enhanced compliance measures will also apply when EU crypto asset service providers interact with non-EU entities.

6) Regarding data protection, travel rules data will be subject to the robust requirements of the European data protection law, General Data Protection Regulation (GDPR).

7) The European Data Protection Board (EDPB) will be in charge of defining the technical specifications of how GDPR requirements should be applied to the transmission of travel rules data for cryptographic transfers.

8) Intermediary VASPs that perform a transfer on behalf of another VASP will be included in the scope and will be required to collect and transmit the information about the initial originator and the beneficiary along the chain.

Let’s take a few of these points in turn.

GDPR is one of the most damaging and destructive pieces of legislation ever enacted. That is not to say that some of its ambitions are not worthy, but the practicalities of its implementation are dangerously unproductive. The phrase “travel rules data will be subject to the robust requirements of … GDPR” strikes a chill in my heart.

I think it is a good thing that “All companies providing crypto-related services in any EU member state will become obliged entities under the existing AML directive” as it will help to focus the minds of some of the less responsible actors in this space, notably Binance.

But point 1) is a major problem.

Right now, most centralised exchanges (CEX) allow one to “whitelist” wallets used to receive withdrawn funds. That process can easily be adapted to include user supplied information as to the name of the owner of the wallet. In most cases that will be the individual whose identity and account at the CEX has already been verified under current anti-money laundering (AML) rules.

But how is it possible to prove that to be true?

And what if the wallet is owned by someone else – I am in no position to provide ID dox for a third party.

And once the funds are in a unhosted or self-hosted wallet, they can simply be transferred elsewhere.

To cap it all, the legislation makes zero mention of decentralised exchanges (DEX), not even an acknowledgement of the huge gaping hole in regulatory coverage that they create. This is a difficult and thorny issue, seemingly too difficult and too thorny for the legislators to even think about.

But there is one last requirement that is at odds with rules in TradFi.

Banks and other financial institutions can rely upon the fact that other banks and financial institutions are regulated either within the EU or another trusted regulatory sphere.

That very important piece of admin busting common sense is being removed from the crypto space.

In effect, all crypto service providers will have to conduct their own due diligence on all other crypto service providers, rather than the regulator themselves.

This is an enormous and unachievable burden to place on CEX and other providers, and on its own will ensure that the EU will not “facilitate … competitiveness and innovation” in the crypto sector.

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