Bitcoin drops to $45.5k as Europe votes to ban cold wallets in attack on decentralization


Bitcoin fell $2,000 from $47,500 to $45,500 in four hours after news broke that the EU is about to cripple innovation in the blockchain space. Today, the European Parliament voted in favor of banning “non-hosted wallets” within the European Union.

Non-hosted wallets

According to their terminology, an unhosted wallet is a non-custodial wallet managed entirely by an individual. This includes cold wallets like Ledgers, Trezor, and SafePal, as well as hot wallets like MetaMask, Trust Wallet, MEW, and many more. The only crypto wallets allowed will be those held by exchanges that require all users to complete KYC verifications. KYC stands for Know Your Customer and is usually part of the centralized financial industry to protect against money laundering.

If you want to use an unhosted wallet, you need to register it with an exchange while revealing your full identity. Our Twitter go-to, Patrick Hasen of Unstoppable DeFi, broke the news in a Twitter thread in 15 parts. Hansen told us:

The vote of the European Parliament on the TFR is a big disappointment and a big threat to the privacy of individuals and the use of self-custody wallets in the EU. It introduces unworkable wallet verification requirements and unjustifiable reporting requirements for crypto companies that would have extremely detrimental effects for EU citizens and businesses. Fortunately, we still have the next trialogue negotiations to avoid the worst.

“Non-hosted wallets” will not be banned from existing within the EU, but you will not be able to interact with an exchange to convert your crypto to fiat or vice versa.

Can DeFi survive in Europe?

Additionally, DEXs will now require customers to register and prove their identity before they can interact on the blockchain. This completely defeats the point of DeFi. If I have to register with a company and hand over my ID to make transactions, that information will need to be centralized and vulnerable to attack. One of the best parts of DeFi is the ability to interact easily and without risking your privacy being stolen.

How and where DeFi companies that operate entirely on the blockchain will store data from their customer records is unknown. This will add additional regulatory and financial overhead to every DeFi project in the EU, as they now have to store every customer’s private and sensitive information.

Along with this news, it was decided to require all wallet users interacting with exchanges to undergo KYC checks. Currently, the limit is 1,000 EUR, beyond which you must register for an exchange and reveal your personal information. With the new legislation, any client using an exchange will need to undertake the KYC process.

Technically, you should still be able to send transactions between non-hosted personal wallets for any amount. However, the most difficult aspect is if you want to send crypto from an exchange wallet to a friend who lives outside the EU. In order for your friend to receive their crypto, they will need to register with your exchange. Our goal is always to be impartial, but that just seems ridiculous to me.

How much time do we have?

Companies will have nine months to adapt to the new regulations, then 18 months to ensure that they fully comply with the new regulations. Whether any European DeFi companies will remain in the EU after the enactment of this decision is up for debate. Given the nature of the industry, they should be able to relocate outside of Europe to circumvent these regulations. Non-custodial wallets cannot be quickly banned due to decentralization by design.

A European citizen cannot be prevented from interacting with a DeFi project outside the EU that does not require KYC, so Europe may simply be shooting itself in the foot by alienating innovative companies. For example, Portugal, a hotbed of DeFi and blockchain innovation, will surely not be happy with the outcome of this vote. There is still time to change the law as it is now moving to trilogies where new negotiations will take place. After that, MPs will vote on the agreed version of the law, and it will become law.