Unhosted crypto wallet transactions may not pose a greater risk to the public than those that are hosted, according to a recent Treasury analysis. Unhosted wallets are preferred by the majority of digital asset owners for a variety of legitimate reasons.

It went on to say that "the top two reasons people pick unhosted wallets are the advantages of customizability and security." Many unhosted wallets offer the benefit of cold wallet storage, which is more secure than hosted wallets. It's also possible that unhosted wallets aren't to blame for illegally storing cryptocurrency.

After consulting with leading industry figures, Treasury takes a U-turn.

Among the reasons for Treasury's decision is an anti-money laundering policy update that it discussed with prominent crypto participants. A special meeting of cryptocurrency companies, academics, government organizations, and regulators was organized to explore possible modifications to the UK's anti-money laundering legislation..

Previously, it was proposed that cryptocurrency exchanges and financial institutions collect and store the specifics of every foreign financial transaction that took place. It was generally acknowledged that this policy would be both impracticable and overly restrictive during the discussion that took place after it was presented to participants. The panelists agreed that this policy would have both short- and long-term drawbacks.

Although some argued that the benefits would outweigh the drawbacks, others said that they were open to the idea. Compulsory KYC policies may be outweighed by the benefits of a well-regulated crypto sector. A proposed KYC rule, therefore, would have a devastating impact on the sector.

Although the decision will be positive for the industry, it also acknowledged that it was a necessary one. As a result, the Treasury has eased the requirement of a de minimis threshold for transactions involving both fiat and crypto. In addition, it would only ask for unhosted wallet transaction details if it deemed those transactions to be risk-sensitive.

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Regulating Unhosted Wallet Transactions

Unhosted wallet transactions are also under scrutiny by authorities outside the United Kingdom. Many of them have already issued statements outlining their views on the subject.

On this issue, the European Parliament just recently voted. It gave its stamp of approval to a change in the rules concerning unhosted wallets. The measure was attacked by cryptocurrency users after the vote because of privacy concerns.

As a leading opponent of the amendment, Coinbase is among the most vocal. There will be a rigorous examination of all transactions on the crypto exchanges because of the EU policy. Because of this, self-hosted wallets would be less innovative and less secure.

In light of the new regulations and the DeFi sector

The new ban on unhosted wallets would have the largest impact on the DeFi industry. For some time now, authorities have been paying close attention to the DeFi industry. The authorities are trying to figure out how decentralized it is. It is also important for them to realize the financial hazards involved.

According to the International Monetary Fund (IMF), the DeFi industry poses a risk to a country's financial stability. Stablecoin issuers should be subject to a new regulatory regulation, according to the report. As stated by the International Monetary Fund, it is difficult to control dispersed entities. Centralized exchanges are controlled by the government, according to the article.