The U.K. Treasury has decided to revoke the requirement for crypto services providers to compile the private information of self-custodied digital wallet users due to privacy-related issues.
In its June report, the Treasury revealed that crypto firms are not needed to keep track of all the funds transferred by users via their non-custodial wallets.
Non-custodial wallets are those blockchain-based wallets that allow users to be in charge of their own funds while custodial wallets belong to centralized entities like Coinbase and Binance that manage the funds of the users.
The report noted that there are “many persons who hold crypto assets for legitimate purposes use unhosted wallets,” adding that there is a lack of sufficient evidence to prove that such wallets are being used for illegitimate purposes. As a result, the Treasury expects crypto businesses to recognize and collect private information for “transactions identified as posing an elevated risk of illicit finance.”
The Treasury released the report after holding consultations with regulators, industry leaders, academia, civil society, and government bodies on the topic of money laundering regulations.
Interestingly, the Treasury earlier recognized that the crypto transfers would fall under the Financial Action Task Force (FATF) standards, i.e., crypto firms will need to maintain records of recipients and payers. But this requirement has been dropped due to privacy, feasibility, and short- and long-term costs.
Some of the consultants advised using Zero-Knowledge Proof (Zk) technology to “demonstrate customer due diligence checks had been performed” and avoid the sharing of private information. Zk technology allows one party to prove that a given statement is true to the other party without sharing any private information.
Self-custody wallets have been a cause for concern for regulatory authorities around the world, with the Lithuanian government passing amendments to the “Law on the Prevention of Money Laundering and Terrorist Financing” and banning the usage of “anonymous wallets.”