Could everyone with DAO tokens in the EU be punished under recent Transfer of Funds Regulations on KYC?

Question

On March 31st the ECON and LIBE committees of the EU Parliament has voted to require cryptocurrency service providers to collect personally identifiable information from individuals who transact more than 1,000 euros using cryptocurrency wallets, as opposed to leaving "their" tokens in exchanges. The rules are not yet law, but nothing is expected to derail the legislation.

Decentralized autonomous organizations (DAOs) are organizations constructed by rules encoded as a computer program running on a blockchain replicated all over the world. They are sometimes registered in some form, for example on July 1, 2021, Wyoming became the first US state to recognize DAOs as a legal entity. However the vast majority are not, and according to wikipedia have uncertain legal standing, and may functionally be a corporation without legal status as a corporation: a general partnership. They are controlled by owners of tokens voting on resolutions, and the results of the votes are implemented without further human intervention. The human interface with the token holders is via wallets, they are a crucial element of the technology.

In general partnerships the owners are jointly and severally liable for any legal actions and debts the company may face.

Does this mean that anyone who holds DAO tokens could be prosecuted and face legal sanction?

Answer 1

Could everyone with DAO tokens in the EU be punished under recent Transfer of Funds Regulations on KYC?

It depends on the enactment or final draft. According to this amended proposal, the answer is no.

Even if a blockchain and stakeholders were considered a DAO, recital 18b implies that neither ownership nor certain methods of trade trigger any obligations pursuant to this regulation. Recital 18b exempts from the scope of this regulation "person-to-person transfers of crypto-assets without the use or involvement of a provider of crypto-assets or other obliged entity, or when both the originator and beneficiary are providers of crypto-asset transfers acting on their own behalf". Recital 18a and others further constrain the scope of the regulation.

Ownership is unaffected. As for transfers, the parties to a person-to-person transaction need to ensure that their method of transfer does not trigger the scope of the regulation. For instance, the last paragraph of article 2.3 provides that electronic forms of payment such as "a payment card, an electronic money instrument or a mobile phone, or any other digital or IT prepaid or postpaid device with similar characteristics" trigger the application of the regulation even for person-to-person transfers.

Article 2.3 showcases the parliamentary sloppiness I pointed out in my comment, and it largely renders the person-to-person exemption meaningless. The drafters' act of listing "a mobile phone" right in the middle of payment instruments and pre-/postpaid devices, culminating with the phrase "with similar characteristics", creates confusion. That is because a mobile phone and a computer possess similar characteristics without either being a payment instrument like the ones listed. Good luck trying to make the transfer via telepathy or osmosis.