Here’s Why Europe Is About to Crack Down on Bitcoin Anonymity

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The EU’s executive body has promised new legislation in the Spring to make sure the exchanges and users of virtual currency platforms such as Bitcoin are identifiable and traceable.

The reason? Terrorism. The move was announced as part of a raft of measures to make it harder for terrorists and their backers to move around funds and other assets.

“We want to improve the oversight of the many financial means used by terrorists, from cash and cultural artefacts to virtual currencies and anonymous pre-paid cards, while avoiding unnecessary obstacles to the functioning of payments and financial markets for ordinary, law-abiding citizens,” said European Commission vice president Valdis Dombrovskis.

What will this mean in practice? The new legislation would force virtual currency platforms to apply more due diligence controls when customers are exchanging virtual for real currencies, by bringing them under the scope of EU anti-money-laundering laws.

The proposals will be set out in full by mid-year, with the aim of making them law across the EU by the end of 2017.

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Bye-bye Bitcoin anonymity — at least, in theory.

Many exchanges for Bitcoin and similar virtual currencies operate outside the European Union, putting them out of this legislation’s reach. And once hard cash has been converted into such “cryptocurrencies,” it’s inherently tricky to track the subsequent transactions.

It does seem to be the case that terrorists sometimes use Bitcoin. A report (PDF) released by the inter-governmental Financial Action Task Force last October included a case study of a terrorist supporter who used Twitter to tell people how to donate bitcoins to terrorists.

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However, as the report also stated: “The actual prevalence and level of exploitation of these technologies by terrorist groups and their supporters is not clear at this time and remains an ongoing information gap to be explored.” While services such as Bitcoin pose a potential threat, they have nothing on more traditional funding methods, self-funding in particular.

Still, the Paris attacks last November created an atmosphere in which the European Commission must be seen to be doing what it can. For virtual currencies, this is the fallout.

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