Europe has reached a historic deal to regulate cryptocurrency trading in the bloc in an attempt to curb what lawmakers call the “wild west” or “wild west” of financial markets.
The member states of the EU (European Union) and the European Parliament defined on Thursday (30) the terms of the rules that aim to protect consumers, allowing this nascent market to flourish.
The rules, known as MICA (Crypto Assets Markets Regulation), represent the first effort to impose standards across the bloc, rather than a patchwork of national rules.
This comes after a severe drop in the prices of tokens such as bitcoin and ether dealt a powerful blow to lending platforms, exchanges and fund managers. Since November last year, popular crypto tokens have dropped more than 70% in value and the market size has dropped by two-thirds to less than $1 trillion.
“Recent developments in this rapidly evolving sector confirm the urgent need for EU-wide regulation,” said Bruno Le Maire, France’s finance minister.
The criteria mean that a cryptocurrency services provider will need authorization from one of the EU’s national market regulators, allowing it to carry out its services across the block. Local regulators will share information with pan-European regulator Esma.
“We will have a new cryptocurrency sheriff in the EU,” said Spanish MEP Ernest Urtasun. The union is “moving from the wild west of unregulated and risky digital assets to a more secure cryptographic sphere,” he added.
Regulated companies will not only face stricter standards to protect consumers, they will also be held accountable if they lose investor funds. Industry – which is often criticized for its considerable carbon footprint – also needs to disclose information about its environmental impact.
Stablecoin issuers will be required to have a presence in the EU and have a “sufficiently liquid reserve”. They will be supervised by the European Banking Authority. A stablecoin is a type of cryptocurrency pegged to assets such as the US dollar, which acts as a bridge between existing financial markets and the cryptocurrency world.
NFTs, non-fungible and digital tokens representing unique works such as art, are excluded from the rules unless they fall under existing categories of crypto assets. The European Commission will re-evaluate the proposals in the next 18 months.
“This will bring regulatory certainty, reduce fragmentation and support the development of a well-functioning, robust market,” said James Kemp, managing director of AFME, a lobbying group for investment banks. However, he added that lawmakers need to clarify some points, such as the legal requirements for cryptocurrency custodians.
The landmark regulation comes a day after authorities agreed to the ToFR (Funds Transfer Regulation), which imposes renewed compliance standards on crypto assets to clamp down on money laundering risks in the industry.
Valeria Cusseddu, policy adviser to the European Parliament’s Economic and Monetary Affairs Committee, said that under the ToFR, cryptocurrency companies would also “have to adopt internal policies and procedures to comply with targeted financial sanctions.”
“The cryptographic sphere is fraught with risk and open to abuse and attacks. We want to ensure that investors have guarantees of protection for their assets and privacy and we avoid cases like the recent cryptocurrency crash where retail investors lost all their money for cause of poorly designed products or scams,” added Urtasun.
Understand the main points of the EU agreement on cryptocurrencies
WHAT ARE THE NEW RULES?
Crypto companies wishing to issue and sell digital tokens in an EU country will have to obtain a license from a national regulator.
The license will allow operators to service the entire 27-country bloc from one base and be held accountable for the loss of crypto assets from consumers’ digital wallets.
Currently, companies show a national EU regulator that they have adequate controls to prevent money laundering, but can only operate within each country.
National watchdogs must update the EU securities watchdog, Esma, on the big traders they authorize, which is almost what has been asked by lawmakers – a European watchdog for the sector.
ARE THE RULES ALREADY IN FORCE?
Not yet. The deal needs a formal stamp from EU countries and the European Parliament before it goes into effect – likely in 2023 at the earliest.
The rules will apply to some tokens, such as stablecoins – cryptocurrencies pegged to traditional currencies or commodities that aim to maintain a stable value – 12 months after the law takes effect. For other tokens, the rules will apply 18 months after the start date.
Crypto companies that already comply with anti-money laundering controls will also have 18 months to obtain licenses under the new law, without disrupting service.
ARE STABLECOINS A BIG PROBLEM?
Certainly. The May collapse of stablecoin terraUSD triggered a sharp sell-off in cryptocurrency markets and worried regulators.
EU rules will give stablecoin holders the right to claim their money back for free. Token issuers will have to maintain minimum levels of liquidity and will be supervised by the European Banking Authority.
Crypto companies must have a registered office on the block to issue stablecoins, and currencies based on non-European currencies will be restricted, to preserve “monetary sovereignty”.
Cryptocurrency industry officials say it will be harder to make money from these rules.
What about NFTs?
It’s complicated. Lawmakers wanted NFTs under the new rules, but EU countries objected.
This has led to an agreement where NFTs are not included, but if they become fungible – mutually replaceable – regulators can force them to comply with crypto rules. If they act like traditional bonds, the EU’s strict MiFID market rules could come into effect.
The European Commission will assess within 18 months whether there is a need for stand-alone rules for NFTs.
CRYPTO AND CLIMATE CHANGE
Bitcoin’s energy usage is a major concern for lawmakers.
Crypto companies will have to disclose their impact on the environment and climate change, using standards that Esma’s securities watchdog will devise.
The European Commission will assess the environmental impact of crypto-assets within two years and introduce mandatory sustainability rules, including the energy-intensive “proof-of-work” system used for mining cryptocurrencies such as bitcoin.
WHAT ARE OTHER COUNTRIES DOING?
Japan blazed a trail among major economies by introducing a cryptocurrency law in 2017, forcing exchanges to register with its financial watchdog. Others were slower.
In the United States, there is no federal structure in place, although individual states have specific rules for cryptocurrencies. Senators this month unveiled a bill to establish new rules and hand most oversight to commodity regulators, though it is unclear when the rules will be passed.
The UK said in April that it will adopt rules on stablecoins, leaving most cryptocurrencies and related companies subject only to varying regulations.
Translated by Luiz Roberto M. Gonçalves
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
