#206—The EU takes on crypto wallets

And Coinbase isn't happy about it

Apr 04, 2022

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out last week’s report here.

This week:

The EU takes on crypto wallets
Coinbase isn’t happy about any of this
Tweetstorm of the week—Wallet edition
Elsewhere in regulations
Tweet of the week—Yellen edition
Forge Global went public via SPAC
Stuff happens

1. The EU takes on crypto wallets

Non-custodial (also known as self-hosted) wallets are at the heart of everything crypto—from NFTs to DeFi to web3.

If the blockchain is the internet of the 90s, then the non-custodial wallet is the web browser. It’s why a firm like Consensys just doubled its valuation to $7 billion off the back of its marquee app, Metamask, a non-custodial wallet for Ethereum with over 30 million monthly average users.

That’s all fine and dandy.

The problem is when regulators knock on the door. Regulating custodial offerings like an exchange is straightforward enough. It’s not so different from any other financial institution that has to manage their funds and customers (along with the relevant data).

When it comes to non-custodial wallets, there isn’t a natural analog. With a non-custodial wallet, it’s sort of like having cash in your wallet or in a safe in your home. For regulators and the industry alike, the challenge will be maintaining privacy and utility for non-custodial and decentralized solutions while still finding a pathway toward compliance.

The EU Parliament, however, doesn’t appear too worried about that.

Here’s Axios:

The Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties (LIBE) voted their support for draft legislation aimed at curtailing crime, with 93 votes to 14, as well as 14 abstentions.
"Under the new requirements agreed by MEPs, all transfers of crypto-assets will have to include information on the source of the asset and its beneficiary, information that is to be made available to the competent authorities," a statement posted the European Parliament website read.

And here’s Blockworks:

The proposal aimed to require crypto service providers, such as exchanges, to collect and share information about the sender and beneficiary of these asset transfers — a practice that payment service providers currently do for wire transfers.
Legislators hoped to ensure traceability of transfers between crypto service providers and so-called “unhosted wallets” so as to be able to better identify possible suspicious transactions and potentially block them.

That the EU is now targeting non-custodial wallets isn’t a huge surprise. Back in October, The Financial Action Task Force (FATF) updated their recommendations to specifically include non-custodial offerings.

Relevant:

2. Coinbase isn’t happy about any of this

From their blog post on the subject:

Among the worst of the proposed provisions are new obligations on exchanges to collect, verify and report information on non-customers using self-hosted wallets. For instance, one provision requires exchanges to not only collect personal data about wallet users who are not their customers, but to also verify the data’s accuracy before allowing a transfer to one of their customers. In fiat terms, this would basically mean you cannot take money out of your bank account to send to someone else until you share personal data with your financial institution about that person and verify their identity. Not only is this verification requirement nearly impossible to do but requiring exchanges to engage in extensive data collection, verification, and retention about non-customers runs against core EU data protection principles of data minimization and proportionality.
Another dangerous provision would require exchanges to inform “competent authorities” of every single transfer from a non-customer’s self-hosted wallet equal to or greater than 1,000 EUR — regardless of any suspicion of bad activity. The proposal even leaves the door open to a total ban on transfers to self-hosted wallets even though there is no evidence that such a ban would have any impact on illicit activity at all. Like we said, bad facts make bad policy.

Consensys isn’t thrilled either, according to Barron’s:

According to ConsenSys, the parent company of MetaMask, rules to track self-hosted wallets would have to target individual users.
This is “a much harder political position to be in than enforcement measures targeting companies,” Bill Hughes, the senior counsel and director of global regulatory matters at ConsenSys, told Barron’s in a statement.
“The regulation will almost certainly not have any measurable impact on financial crime while being most assuredly burdensome on people and businesses conducting lawful activity,” Hughes added. European lawmakers still have time to reconsider the regulations, he added, noting that the crypto industry would mobilize against the proposals.

3. Tweetstorm of the week—Wallet edition

Here’s Brian Armstrong’s take:

4. Elsewhere in regulations

5. Tweet of the week—Yellen edition

Squawk Box:

6. Forge Global went public via SPAC

From TGV’s press release:

True Global Ventures has been an ardent believer and long-time investor of the private securities market segment because of the trend of companies staying private longer than in the past. Since TGV Fund 1 in 2010, TGV made early investments into SharesPost, a company acquired by Forge in 2021, and made additional investments from Fund 2 and Fund 3, together with other prominent investors such as PhillipCapital, etc.
True Global Ventures Fund 4 Plus then invested directly into Forge in 2021, in the oversubscribed round of more than US$150M in new funding, together with other existing investors Deutsche Börse and new investors like Temasek, Wells Fargo Strategic Capital, LUN Partners Group and others. Forge continued to show strong growth in 2021 with record revenues and trading volumes. Revenue less transaction-based expenses grew a robust 75% year-over-year in 2021, above published forecast and trading volume continued a sharp upward ascent, growing 71% in 2021 to $3.2 billion.

And here’s Barron’s:

Founded in 2014, Forge provides a secondary market where investors and employees of highly valued private companies can sell their shares. To buy stock of private companies on Forge, investors need to be accredited, usually defined as having at least a $1 million net worth. Right now, accredited investors on Forge can buy stock in ByteDance, owner of TikTok; Bolt, an online checkout company; and Kraken, a smaller rival to Coinbase (COIN).
“It’s a huge and amazing milestone,” said Kelly Rodriques, Forge’s CEO, who spoke to Barron’s from the NYSE. (Forge executives rang the opening bell at the Big Board Tuesday.) Rodriques held up a picture of his father, who died recently. “I told him I would take a company public, but he didn’t get to see it…. We’re super excited to be connected to this,” Rodriques said.
Forge competes against rivals like EquityZen, Carta, and Zanbato, but is the first private-market platform to go public, Rodriques said. “By being a public company with public stock available for everybody, you could make an investment in the private markets by investing in Forge,” he said. “You would invest in Forge as a proxy for investing in the private market.”