Crypto CEO warns of mass surveillance risk under ‘track and trace’ proposals

The European Parliament’s efforts to track and trace people’s cryptocurrencies will push society into a deeper state of mass surveillance, according to one of the leading players in the booming market.

Pascal Gauthier, whose company, Ledger, offers a USB-like digital wallet for people to hold cryptocurrencies outside of exchanges, issued the warning after MEPs passed due diligence checks for crypto transfers last week. The rules came in the form of amendments to the EU’s Transfer of Funds Regulation (TFR) bill, which still needs to clear final legislative talks with EU capitals.

Lawmakers introduced the checks into the so-called travel rule to stop criminals from abusing the crypto market’s anonymity to move illicit funds around in the form of virtual assets. The rules prevent such transfers by requiring companies to check who’s sending funds, of any amount, in the form of cryptocurrencies — and who will receive them.

The measures are overkill, as far as the crypto industry is concerned. It claims that the online and distributed ledgers, known as the blockchain, underpinning crypto transactions make permanent records of where virtual assets are sent — an argument MEPs don’t buy.

Industry leaders like Gauthier fear that MEPs’ good intentions will backfire and encourage a police state, where everyday payments with crypto are tracked and stored. That claim is also something MEPs reject — although the changes could make it more difficult, for example, for people to hide their identity from Russian authorities when sending funds in the shape of crypto to help Ukraine or support Kremlin critic Alexei Navalny.

While there’s no guarantee that the amendments will survive the final leg of EU negotiations in Brussels, the mere chance that they could become reality has Gauthier sounding the alarm.

“Imagine you have a wallet, your leather wallet, and you’ve got cash in it. Now every time that you’re going to pay in cash somewhere, you’re going to have to flash your ID … and they’re going to note your name,” the 45-year-old said. “This is not the world I want to live in.”

This isn’t the first time that political risk has overshadowed Europe’s crypto industry. A left-Green bloc in Parliament last month fell short of introducing new rules that would have phased the predominant and energy-intensive blockchain technology out of Europe, putting Bitcoin at risk. And now crypto representatives are convinced that MEPs are using anti-money laundering policies to disguise efforts to undermine the $2 trillion market.

“Some groups in the European Parliament have some very specific and dogmatic agenda … [and are] using excuses to ban Bitcoin and cryptocurrencies as much as possible,” Gauthier said. “Rumors they’ve heard. Like, oh, I heard it’s for money launderers. Come on, guys. Let’s be professional.”

Ernest Urtasun, the Spanish Green MEP who shepherded TFR through Parliament alongside Belgium’s Assita Kanko of the European Conservatives and Reformists, dismissed the accusations, especially the claim that their measures would encroach on people’s right to payment privacy.

In fact, the due diligence checks don’t apply “if you pay to purchase goods or services with your Mastercard or with your mobile phone with crypto,” Urtasun said, explaining that the rules only apply when people try to move funds from one location to another. “We legislators anticipated the possibility that if this becomes a means of payment … we should apply the same rules as [standard currency].”

Policing with blockchain

Much of the disagreement between the Parliament and the crypto advocates stems from opposing views over blockchain’s ability to help police suspicious activity within the market.

Research from Chainalysis, a blockchain data platform that helps government agencies and companies in the financial sector with risk management and compliance, found just 0.15 percent of crypto transactions last year were involved illicit addresses. That figure doesn’t include all forms of crimes, such as money laundering, although there are doubts that those activities would push the statistic above 1 percent if included.

Criminals will in any case leave their digital fingerprints all over the blockchain, making it easy for authorities to trace their footprints, Gauthier said. This is made even easier by the fact that anyone wants to convert their ill-gotten crypto funds into hard cash will have to use online exchanges, which carry out know-your-customer checks on all customers.

“You cannot hide everything, because you’re connected to a public blockchain … so all your transactions will be tracked,” Gaulthier said. “And if you do something wrong, it’ll come to haunt you.” He pointed to the example of how the U.S. Department of Justice managed to track and arrest a married couple in New York who stole $3.6 billion in Bitcoin from an exchange called Bitfinex in 2016. “It’s a terrible tool for terrorists and money laundering.”

But Urtasun isn’t convinced and also cites work by U.S. authorities to make his point. The Financial Crimes Enforcement Network, the agency within the U.S. Treasury that combats dirty money, published a report in late December that proposed certain rules to collect and identify customers who transact with virtual currencies. It concluded that blockchain’s ability to track criminals was no panacea, as there are certain applications that can obscure people’s identities when using cryptocurrencies.

These applications, known as mixers, collect cryptocurrencies from paying customers and pour them into a whirlpool of virtual assets before distributing a mishmash of cryptos back into people’s wallets — making it much harder, but not impossible, to see who has what. It’s worth adding that the use of mixers, such as Tornado Cash, is not widespread.

Seeking alternatives

Gauthier is hopeful that EU capitals will dismiss the Parliament’s amendments in the coming weeks. But he holds a fundamental fear that people are sleepwalking into a surveillance state, which was somewhat normalized during the pandemic with vaccine passes, in his view.

Meanwhile, public debt is climbing, prices continue to rise, and legislators are making it harder for people to seek alternative means of finance with cryptocurrencies, the chief executive warned.

“People will have a way to protect themselves and to safe keep their money … and as soon as they go into crypto, the same government … will say, ‘Oh it’s not good anymore,’” he said. “I’m a citizen. I want my money to be protected, to feel safe. There is a [financial] system, but I prefer Bitcoin. Why is this taken away from me?”