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The Future of Privacy Cryptocurrency in the European Union
Development Update
Proposed legislation may pull privacy cryptos off European exchanges

On July 20, 2021, the European Commission filed a document in Brussels entitled “Proposal for a regulation of the European parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.” Within the proposal was a clause that is likely to affect the future of privacy-focused cryptocurrencies within the European Union, including Discreet.

The proposed legislation would widen the parameters of the EU’s existing Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) laws to encompass cryptocurrency. 

The proposal recognizes that “technology keeps evolving, offering opportunities to the private sector to develop new products and systems to exchange funds or value,” and suggesting that this evolution “is a positive phenomenon.” However, they concede, “it may generate new money laundering and terrorist financing risks, as criminals continuously manage to find ways to exploit vulnerabilities in order to hide and move illicit funds around the world.”

Operating under the assumption that any financial tool designed to protect the privacy of the currency owner is also likely to be used illegally by criminals, the proposal suggests “expanding traceability requirements to crypto-assets.” 

Cryptocurrency, of course, was designed to be decentralized and more-or-less autonomous, such that banks or governments could not interfere with or disrupt the financial mechanisms built and set in motion by pioneers like Satoshi Nakamoto with Bitcoin. The Discreet project was founded on these same principles, and indeed was structured in such a way as to make our platform secure against the machinations of governmental structures that might wish to exercise control over its operation.

There are cryptocurrency-related areas over which governments and regulators can exert control, including centralized exchanges, which is exactly what this proposed legislation purports to target; so-called “crypto asset service providers” (CASPs), and prohibits “the provision and custody of anonymous crypto-asset wallets.”

Indeed, the proposed legislation states that “the anonymity of crypto-assets exposes them to risks of misuse for criminal purposes. Anonymous crypto-asset wallets do not allow the traceability of crypto-asset transfers, whilst also making it difficult to identify linked transactions that may raise suspicion or to apply to adequate level of customer due diligence.” 

Surely this is the case for Discreet as it is for Monero, ZCash and other similar projects. While objectively true, Discreet firmly believes that privacy is a human right, and that the illegal actions of organized criminals or terrorists should not impair an individual’s freedom to exercise that right, however easier it may seem to make the hard work of policing illegal activity. (We might even suggest the criminals and terrorists will not find that this legislation greatly impedes their ability to launder money or raise illicit funds, since people who are willing to unabashedly break the law to achieve their nefarious purposes are unlikely to be dissuaded by a measure that can only realistically be applied to a handful of centralized exchanges.)

However, in the areas over which the European Union can exercise authority, namely crypto-asset providers, Discreet (along with other coins) would be affected by this legislation, when it is enacted. The proposal declares, “in order to ensure effective application of AML/CFT requirements to crypto-assets, it is necessary to prohibit the provision and the custody of anonymous crypto-asset wallets by crypto-asset service providers.”

This clause may prevent privacy coins from being legally listed on centralized exchanges operated within the European Union, as it compels crypto-asset service providers to “apply customer due diligence when either initiating or executing an occasional transaction that constitutes a transfer of funds.” For a currency like Monero, with by-default private transactions, this could mean their coin may be removed from European exchanges in the coming years.

Discreet is in a comfortable position vis-a-vis this proposed legislation, (in contrast to Monero, for example), because Discreet allows for both transparent and shielded transactions. Under this proposed legislation, anyone could legally operate a fully-anonymous Discreet node within the EU, but would need to deshield any transaction sent to a centralized exchange within Europe. Node operators do not fall into the category of ‘wallet providers’ or ‘custodians’ as defined in the current Anti-Money Laundering Directive 5 (AMLD5).

Likewise, there is nothing in this legislation that would prevent Discreet from being listed on centralized exchanges in Europe, with the understanding that those exchanges would need to enable and operate exclusively transparent transactions on the Discreet network. This is annoying, but not catastrophic. (Decentralized exchanges, of course, would be unaffected.)

Problematic to legislation such as this is the global nature of the financial trade coupled with the balkanized nature of the regulations put in place to control that trade. At a certain point, as with Discreet, there is simply not a law that can be enacted which would interfere with the designed function of the project, purpose-built as it was to provide maximum autonomy as well as unbreakable privacy functions and cryptographically-assured anonymity.

The fact is, and history has affirmed, technology is consistently able to evolve in a way that will grant people the freedom to which they feel they are entitled. If that technology is created in the service of contravening laws in order to ensure that freedom, that consideration has not heretofore stopped this forward march.

The Discreet team views this particular piece of proposed legislation as further evidence of the need for currencies like Discreet. In a world where privacy is presumed to be synonymous with criminal activity, we need tools that guarantee privacy in decentralized, distributed and unstoppable ways. Governing bodies clearly find it easier to outlaw privacy in an effort to make their jobs easier, and in exchange for an illusion of safety and control. However, the mathematics of cryptography simply cannot be regulated. 

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