The European Union has approved rules that target anonymity in the digital asset space after a close vote on Thursday afternoon.

The Committee on Economic and Monetary Affairs and the Committee on Civil Liberties, Justice and Home Affairs have voted to tighten know your customer (KYC) and anti-money laundering (AML) rules on crypto companies.

Ostensibly, the new rules crackdown on “unhosted” wallets and the way they interact with crypto exchanges and service providers. Under the new measures, companies will have to collect and share data about the wallets that send and receive funds from their platforms, even those owned by individuals who are not their clients.

According to Paul Grewal, Coinbase’s chief legal officer, the new rules would create a new surveillance state which would stifle innovation and threaten privacy and security.

“If adopted, this revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets,” he said in a blog post.

“Unlike with cash, law enforcement can track and trace digital asset transfers with advanced analytics tools. None of this requires upsetting the settled privacy expectations of wallet holders because the open architecture underlying digital assets is public and offers unprecedented transparency into transaction details.”

The way the Coinbase executive describes it, the rules are akin to not being able to send money out of your bank account until you share the recipient’s personal data with your financial institution and verify their identity.

“Not only is this verification requirement nearly impossible to do but requiring exchanges to engage in extensive data collection, verification, and retention about non-customers runs against core EU data protection principles of data minimization and proportionality.”

According to Patrick Hansen, head of strategy and business development at DeFi company Unstoppable Finance who has been following the developments, some of the new requirements are basically unfeasible for many companies.

“We expect that companies like Coinbase would only allow transfers to unhosted wallets linked to their own customers and verified through a private key signing (which makes these transfers more complicated and costly).

Smaller crypto companies with fewer resources might even go so far as to not allow any transfers to self-custody wallets anymore. This in turn would cripple their competitiveness, and European users would turn towards foreign providers instead.”

The EU’s latest vote comes as talks of regulation brew in the UK as well. Earlier in the month, the U.K.’s National Crime Agency said it wanted to clamp down on crypto mixers like Tornado Cash or Wasabi Wallet that obfuscate transactions to onlookers.

The NCA wants mixers to be contained within a regulatory framework that forces them to require KYC rules and record the trails of funds moving through their platforms.

“When it comes to crypto transactions, the owner’s identity is already obscured, and the reality is that prying eyes would need additional, hard to get information to determine a wallet’s balance and its owner,” Gary Cathcart, head of financial investigations at the NCA, said in a statement. “The argument on privacy is, therefore, a weak one.”

Simultaneously, the UK has also introduced requirements for crypto companies to register with the Financial Conduct Authority (FCA), something that isn’t possible for many firms. According to the FCA, 80% of applicants had not met the requirements, and only 33 firms had successfully made it through the red tape as of early this week.

The deadline for UK firms to register, which was originally March 31, has since been extended for some companies who require more time to finish their applications.

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.