KYC, filtering and sanctions: The European Banking Authority wants to tighten the regulation of cryptocurrencies

Two rooms, two atmospheres. While pro-crypto euphoria is gaining momentum in the US, it is not the case in Europe. Yesterday, November 14, 2024, the European Banking Authority (EBA) published guidelines for digital asset service providers (DASPs) and payment service providers (PSPs). These documents aim to strengthen the compliance of financial players with the restrictive measures of the European Union. These recommendations are a direct response to the growing challenges of overseeing financial flows as the prices of cryptocurrencies, led by Bitcoin, explode. Explanations.

The Rise of Cryptocurrencies: A Coordinated Response from Europe

L’ABEbased in Paris, was created in 2011 after the 2008 financial crisis with a mission to:

• ensure financial stability,
• guarantee the harmonization of rules within the 27 member states of the European Union.

Faced with the threats posed by money laundering and terrorist financing, the EBA is working to make regulations more consistent and effective across Europe.

In this context, the new guidelines in the 71-page manual, issued, are an extension anti-money laundering (AML) legislative package adopted by the European Commission in 2021. This package includes Regulation (EU) 2023/1113, which will enter into force on 30 December 2025 and imposes strict compliance restrictive measures national and European.

In parallel, MiCA (Markets in Cryptographic Assets)adopted in 2023, is a broader regulatory framework that covers activities related to digital assets in the European Union. Establishes rules for stablecoin issuers, exchanges and other services related to digital assets with an emphasis on consumer protection and market transparency.

Although the two regulations have points of contact (for example, they apply to PSAN), they have different objectives. in short:

• Mica : Market Regulation and Consumer Protection in the Digital Assets Sector.

• Regulation (EU) 2023/1113 : Combating money laundering and terrorist financing.

So it’s a new blow to the ecosystem.

What the EBA guidelines provide

ABE has issued clear recommendations on the regulation of PSPs and PSANs. These measures, which aim to strengthen compliance and financial security in Europe, will apply from 30 December 2024 and be mandatory from 30 December 2025. Here are the highlights:

Strengthening internal management

ABE requires PSPs and PSANs to implement a robust management framework in order to reduce operational and legal risks. These institutions must incorporate specific policies related to restrictive measures into their risk management systems.

The main objective is to ensure that no sanctioned entity or individual has access to financial services, thereby ensuring strict compliance with European regulations.

WITHtransaction filtering systems

Must use PSP and PSAN automated filter systems to identify individuals or organizations on the sanctions lists of the European Union and its member states.

These tools, which are constantly being improved, enable accurate identification of sanctioned entities while minimizing errors such as “false alarms”. These correspond to incorrect alerts generated by the system. They are often caused by name similarities or data errors and require a human verification to avoid unjustified blocks.

Managing circumvention risks

Institutions must also accept procedures for identification and manage attempts to circumvent the rules. This includes enhanced monitoring of transactions originating from sensitive geographic areas or using sophisticated anonymization tools such as cryptocurrency mixer.

Finally, PSP and PSAN employees must be trained regularly keep up-to-date on regulatory developments and effectively detect new risks associated with these restrictive measures.

Nothing new for cryptocurrencies in the west

These instructions, which will become mandatory on December 30, 2025represent progress in the harmonization of procedures within the European Union. Theoretical.

In practice, by clarifying the expectations and responsibilities of payment service providers and PSAN service providers, the EBA intends to strengthen the security of financial flows while strengthening trust in digital asset services. However, this the ambition of European standardization is accompanied significant restrictions on players in this sector.

On the one hand, two European regulations – MiCA and Regulation (EU) 2023/1113 – show strict approachsometimes perceived as excessive severity towards the cryptoecosystem. Although they aim to harmonize procedures, they impose complex technical and administrative dutiesespecially for smaller buildings. The document published by ABE, which is intended to offer a clear framework, is also particularly technical, making it difficult for some operators to apply.

On the other hand, the establishment automated filter systems to comply with European restrictive measures increases ethical and philosophical issues. KYC (Know Your Customer) requirements directly contradict the founding ideals of Satoshi Nakamoto and the decentralized philosophy underlying DeFi (decentralized finance). These new rules risk limiting the reach of DeFi solutions by imposing restrictions that run counter to their permissionless and anonymized nature.

Finally, although these reforms are presented as a lever to stabilize and protect the European financial ecosystem, they could also slow its momentum by pitting centralized regulation against a fundamentally decentralized technology. This raises the question of the balance that needs to be struck between state control and respect for the underlying principles of blockchain. Or how to fit a square into a circle. Continued in Le Journal du Coin.