Under the guise of combating money laundering, European Union officials have proposed new rules on cryptocurrencies that would considerably undermine the anonymity afforded digital assets such as Bitcoin by requiring strict new reporting requirements for the exchanges that facilitate the trading of such assets.

The draft legislation, approved by an EU parliamentary committee on economic and monetary affairs by a vote of 93 to 14 on Thursday, would require crypto firms to collect and share data on all transactions, including the identities of all parties involved.

The measures are intended to extend the anti-money laundering and “know your customer” rules that apply to other players in the financial sector. Instead of a 1,000-euro floor on reportable transactions many other players enjoy, though, cryptocurrency exchanges such as Coinbase and Binance would be required to catalog even the smallest transactions.

A Spanish Green Party parliamentarian, Ernest Urtasun, a member of the committee that approved the resolution, said the measure was necessary in order to control money-laundering avenues for bad actors like the oligarchs supporting Vladimir Putin’s war against Ukraine.

“With this legislation we will close the loopholes that can allow criminals and the corrupt to abuse crypto-assets in order to launder money,” Mr. Urtasun said in a statement. “Crypto transfers will be subject to the same rules as financial institutions, inline with international best practices.”

The proposed measures are an attempt to put a stop to anonymous transactions — or at least those involving an exchange — on the Bitcoin blockchain. Currently, the amounts of such transactions are public but the parties involved can remain anonymous.

Unless a cryptocurrency is used to purchase something directly, exchanges are currently the best way to extract value from the digital assets. They are the means by which cryptocurrencies can be converted into a government-issued currency like the dollar or euro.

The measure also would crack down on unhosted wallets, held by individuals as opposed to exchanges, including the so-called cold wallets like thumb drives or other hardware devices that are not connected to the internet and therefore are impervious to hacking or confiscation.   

Right-of-center parties in the European Parliament, along with several big players in the crypto industry, said the measures, if approved, would amount to a de facto ban on these self-hosted wallets.

It would be difficult, if not impossible, industry leaders said, for exchanges to identify both parties in such transactions, and thus many exchanges would be forced to cut off transactions with the unhosted wallets altogether in order to remain compliant with the rules.

The CEO of France-based wallet-maker Ledger, Pascal Gauthier, warned that the rules could lead to the creation of a registry of wallet addresses that would allow government officials to monitor their citizens’ cryptocurrency transactions in real time.

“We need smart regulations tailored to specific problems, NOT wholesale bans and massive government intrusions into citizens’ private lives,” he tweeted. “Instead, EU policymakers are ensuring that the Web3 revolution won’t happen in Europe. We are repeating past mistakes that prevented us from leading the first Internet revolution.”

In a series of tweets posted just before the vote, the CEO of Coinbase, Brian Armstrong, one of the largest cryptocurrency exchanges, said the measure would create a “new crypto surveillance regime” and stifle innovation in the sector going forward.

“Imagine if the EU required your bank to report you to the authorities every time you paid your rent,” Mr. Armstrong tweeted. “Or if you sent money to your cousin to help with groceries, the EU required your bank to collect and verify private information about your cousin before allowing you to send the funds?

“How could the bank even comply?  The banks would push back,” he added. “That’s what we are doing now.”

Before the new rules could go into effect, they must be agreed to by the EU Parliament, the European Council, and the European Commission. If no measurable opposition surfaces, the crypto industry will have nine to 18 months to come into compliance.