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How I Learned to Stop Worrying and Love Unhosted Wallets - by Coin Center

The “Expert Views” series of publications allows legal and technical practitioners in the cryptocurrency space to share their insight and opinions. The views expressed here are those of the author and not necessarily those of Coin Center.

Over the past year, governments around the world have expressed concern about the risks of illicit financial activities such as money laundering, terrorist financing, and the evasion of international sanctions arising from the use of “unhosted” wallets—software applications that allow users to conduct pseudonymous, personal transactions in crypto assets over the internet without the use of a financial intermediary. The clearest expression of this concern is a recent study published by the Financial Action Task Force (FATF), an intergovernmental body founded in 1989 by G7 countries to publish and promote global adoption of regulatory standards that combat illicit financial activities. That report acknowledged the limited risk currently posed by unhosted wallets in comparison to traditional financial channels, but nonetheless urged global regulators to consider various restrictive measures should adoption increase. Proposed measures for consideration included transaction limits on unhosted wallets, restricting the ability of regulated financial institutions to transact with them, and licensing, or even prohibiting, the platforms that support them. The report echoes fears about personal crypto transactions expressed by policymakers in the United States, which has traditionally been the vanguard of efforts to disrupt and dismantle illicit financial networks.

These recommendations represent a noticeable shift in global regulatory priorities to combat illicit financial activities that originated over 50 years ago in the United States with the passage of the Bank Secrecy Act (BSA), the first anti-money laundering (AML) regime in the world...

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