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Kc  · 09/01/22

EU AML proposal against unhosted crypto wallets: What to do to prepare for crackdown (legally)

Altcoin Trading Blog
06/27/23 · Psa

About This Blog Post

  1. European Parliament wants to cancel self-hosted wallets
  2. Consider forming a one-man company to avoid issues later
  3. Also, NFT/DeFi will be shook if the law goes through
  4. Uses ledger  ( + more posts) 
  5. Uses bitfinex  ( + more posts) 
  6. Filed as References
  7. On the same topic: EU AML proposal against unhosted crypto wallets: What to do to prepare for crackdown (legally)
  8. On the same topic: PSA - Don't send ETH or ERC20 tokens between exchanges
EU Parliament committees are preparing restrictions against the undocumented use of wallets like Ledger or Exodus. Here is what you can do to legally and safely keep staking and trading.
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You may have heard about the new crypto regulation that was (just about) approved for advanced policy development stages by the European Parliament at the end of March 2022.

If you haven’t, essentially it’s a limitation or a possible crackdown on self-hosted wallets like Ledger or Exodus.

About the proposed regulation

This new regulation is still not in it’s final stages, but it’s in a process of fine-tuning. There may by changes, but it looks like some version of the current proposal will get approved near the end of 2022.

Here’s what is known:

Realistically, it looks likely that the AML documenting rule will be required only for transfers over certain value. With fiat currencies it’s 1k EUR, but the crypto regulation in its current iteration does not mention a minimum limit.

If you live in the European Union, and if the legislation goes through fully, it will impact you.

It might be better to make a move while there is still time - that is, if you trade, hold or stake crypto. There are a few easy things you can do to keep doing exactly the same in the future without breaching the law.

What’s the danger

So, what this law proposal wants is to collect data to pair an IRL identity with a cryptocurrency address and all its history.

This is understandably done to collect taxes, but the real impact is that a full file of your personally identifiable information will sit in a database on an EU server, until it gets hacked.

Then everyone will be able to buy (for Monero!) the database dump, including your photo ID, proof of address, crypto transaction hashes… Learning that somewhere at your filed residential address - probably in the bedroom drawer - there is a steel plate with a seed phrase key to 268 ETH, the owner of which being a pale 130 lbs nerd. Easy job!

It doesn’t get any better if you leave your crypto on an exchange, by the way. Almost all exchanges do full AML/KYC on you and will have to be submitting your file to the EU AML authority for your exchange withdrawals.

Here’s what you can do

If you want to avoid both possible blacklisting and the impact on your privacy, start a one-man company in a country that already has a stable cryptocurrency regulation in place.

  • Acting as a company, your personal details will not be filed with your transactions - those of your company will.
  • Any possible dire version of wallet blacklisting will not concern you, because you will be able to tie a business entity with your crypto transactions.

Estonia has one of the easiest systems to create business and work with cryptocurrency.

Under the latest 2021 laws, Estonian companies do not need any special license for most cryptocurrency activities except asset management for clients, exchange services and crypto custody services. You only need to apply for a license if you plan to trade or store cryptocurrency that belongs to your clients and charge a commission for that service, or if you plan to run a crypto trading platform. (Source: agency reference docs)

Off-license cryptocurrency activities for Estonian businesses include trading with your personal capital contributions to the company, trading with company profits and billing in cryptocurrency.

You can set up your company purely with cryptocurrency, too. Estonia allows any cryptoasset or token as the means of payment for your owner contribution to the company’s share capital. The minimum share capital for a company that doesn’t need a license is 2500 EUR. (Source: Same as above)

  • Here’s 50 EUR off the setup fees with one of the biggest agencies that help set up companies in Estonia. They provide the full service, from your identity registration in Estonia to your monthly and annual tax reports.

Caveats you should know of

The following information is only intended as an overview and a stepping stone for further research, not as a financial advice.

  1. Taxes

    Estonian companies do not pay any income tax on income that is reinvested. That is to say, unless you pay a salary to yourself or an employee, there is no income tax to pay. That’s one of the reasons why trading via an Estonian company is so convenient. (Source: A 101 reference guide at consultancy)

    Taxes on crypto may get complex though. The rules are based on the substance of the income: A cryptocurrency received as an invoice payment is treated differently than cryptocurrency actively traded.

    So, before you act, always verify your information by talking to an accountant - here’s that 50 EUR shill link again.

  2. Banks

    An important caveat is that when setting up your Estonian company, at some point it may be necessary to take the trip to Estonia and open a bank account in one of the local Estonian banks.

    The most common bank solution used is the remote setup provided by TransferWise (now just Wise).

    Wise is a provider who has super low fees and will set up your bank account without traveling anywhere, but who unfortunately does not work with cryptocurrency companies.

  3. Trading platforms

    Practically, you will need to get corporate KYC on crypto trading platforms if you want to trade. You may run into difficulties with some providers: Cryptopay isn’t keen on accepting newly formed companies for instance, while FTX has a much less demanding corporate onboarding.

    Generally speaking it helps to have some sort of past record.

    If your company is new and your plan is to earn just by trading crypto, you should provide a proof that you are the only owner of your company and add trading logs or reports from the past, in your name.

    If you don’t have those documents, you might need to first use your company to actually work (ew!) and build up until trading platforms stop considering your company too risky to onboard.

Lastly, consider the impact

AltcoinTrading.NET is a website for crypto traders, so by way of a conclusion I will list some of the potential impacts of the new legislation.

  • Only zero-knowledge P2P trades will not be directly impacted: P2P between two anonymous individuals in a zero-knowledge way does not provide anyone with the information of where the counterparties live.
  • There is a problem with onramping P2P though, like through LocalCryptos: For one, you choose your trades based on your geo location.
  • Smallest holders are going to be impacted the most: Even now the exchange minimums and withdrawal limits on exchanges are often between 10-50 USD. If there’s more paperwork added to it, the minimums will likely increase.
  • Barrier to retail entry into crypto generally will rise.
  • Total locked values in DeFi are possibly going to get way down.
  • Retail segments like NFTs and gaming are bound to be impacted the most, at least in theory, unless they are truly decentralized in a zero-knowledge way.

Disclosure: All products featured on AltcoinTrading.NET are independently chosen, but some of the links on this page are affiliate links. Read our full content disclosure to learn more.

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