DeFi dubbed 'high risk' in EU’s latest anti-money laundering bill draft

Fresh amendments to the European Union’s anti-money laundering bill may put decentralized finance under greater scrutiny, as negotiations continue in the European Parliament.

The latest draft of the legal text shows that parliament staff have added decentralized applications to a list of "high risk" factors, which may make transfers to and from DeFi protocols subject to higher due diligence measures, according to a document seen by The Block and confirmed with multiple sources familiar with the matter but not authorized to speak to on the record. Other activities defined as high risk in the text include transfers to self-hosted wallets which aren’t linked to an identity and unregistered crypto service providers. 

The current text is likely to change, however, as members of the European Parliament will convene to discuss the legislation next week, sources with knowledge of the matter confirmed. 

The European Parliament declined to comment and referred queries to the parliamentary rapporteurs, who didn't immediately respond to a request for comment. 

The anti-money laundering bill is likely to be the only EU law that could oversee decentralized protocols until after the next European elections in 2024, although the European Commission has begun exploring DeFi supervision. The EU’s comprehensive crypto rule book, the Markets in Crypto-Assets regulation, did not include DeFi in the scope of the crypto service providers’ licensing regime. 

DeFi regulation

A new technical note accompanying text changes highlights that this regulatory gap makes DeFi a higher risk. It lays down five reasons for the "high risk" classification, including lack of intermediaries to perform KYC checks and that decentralized protocols can be used to “obfuscate” the source of funding. 

This may be a nod toward the sanctioning of crypto mixer Tornado Cash last August. The U.S. Treasury accused Tornado Cash of "laundering funds for malicious cyber actors," sparking a debate on what it means to supervise decentralized protocols, where no single entity is in control. Tornado Cash developer Alexey Perstev is currently detained in the Netherlands awaiting trial.

Decentralized finance was first included in the AML bill in September. Last week, NFTs were the subject of closer inspection.

The AML regulation draft will need to pass a vote from the two parliamentary committees overseeing negotiations on March 28. Then, it will receive a plenary vote before negotiations between the European Commission, European Council and European Parliament on the file can begin.