Article Summary
- The European Union has approved the world’s first comprehensive regulation on cryptocurrencies, known as the Markets in Crypto Assets (MiCA) Act. The act aims to provide legal clarity and reduce risks associated with cryptocurrencies while supporting innovation in the sector.
- The MiCA Act will require digital asset service providers to register with regulators, comply with rules on transparency and customer protection, establish requirements for stablecoins, and prohibit anonymous transactions. Stablecoins like Tether and Circle’s USDC will be required to maintain ample reserves to meet redemption requests in the event of mass withdrawals.
- The EU’s move is expected to set a precedent for other jurisdictions to follow, highlighting the importance of regulation in the crypto industry. The new rules are set to come into effect in 2024, providing companies with ample time to prepare and comply with the regulations.
In a landmark move, the European Union has approved the world’s first comprehensive regulation of cryptocurrencies. The new regulations will require digital asset service providers to register with regulators and comply with rules on transparency and customer protection while establishing requirements for stablecoins and prohibiting anonymous transactions.
The aim of these regulations is to provide legal clarity and reduce risks associated with cryptocurrencies while supporting innovation in the sector. This comes as a significant step towards addressing the challenges posed by the increasing adoption of cryptocurrencies in the financial sector. The EU’s move is expected to set a precedent for other jurisdictions to follow, highlighting the importance of regulation in the crypto industry.
The new rules are set to come into effect in 2024, providing companies with ample time to prepare and comply with the regulations. This decision is expected to have far-reaching implications for the future of the crypto industry and its role in the global financial system.
Key Takeaways
The EU Parliament voted 517 in favor and 38 against passing the Markets in Crypto Act, or MiCA. The legislation, which seeks to reduce risks for consumers buying crypto assets, will mean providers can become liable if they lose investors’ crypto assets.
The rules will impose a number of requirements on crypto platforms, token issuers, and traders around transparency, disclosure, authorization, and supervision of transactions, the EU Parliament said in a statement Thursday.
Platforms will be required to inform consumers about the risks associated with their operations, while sales of new tokens will also come under regulation. Stablecoins like Tether and Circle’s USDC will be required to maintain ample reserves to meet redemption requests in the event of mass withdrawals. Stablecoins that become too large also face being limited to 200 million euros ($220 million) in transactions per day. The transaction volumes of stablecoins (not pegged to the euro) as a medium of exchange must remain below the quarterly average of EUR 200 million per day and 1 million transactions per day.
The European Securities and Markets Authority (ESMA) will be given powers to step in and ban or restrict crypto platforms if they are seen to not properly protect investors or threaten market integrity or financial stability. MiCA also addresses environmental concerns surrounding crypto, with firms forced to disclose their energy consumption as well as the impact of digital assets on the environment.
Parliament also cleared a separate law that aims to reduce the anonymity involved in transfers of cryptocurrencies like bitcoin and stablecoins, voting 529 to 29 to pass the Transfer of Funds regulation. This is termed the “travel rule,” which requires financial companies to screen, record and communicate information on both sender and recipient, to crypto transactions to help combat money laundering.
Transfers between exchanges and self-hosted wallets owned by individuals will need to be reported if the amount tops the 1,000-euro threshold. This particular clause is a contentious issue for crypto enthusiasts who often trade digital currencies for privacy reasons.
Non-fungible tokens have definitely been the most delicate topic for regulators to deal with, as they had to frame them in the most appropriate way, without falling into the mistake of confusing them with different financial products compared to what they really represent.
the European Commission decided that non-fungible tokens representing works of art, digital collections or real estate will not be part of MiCA regulation, hence will not be subject to the rules described in the text. The only note to consider is the fact that if NFTs that are fractionalized or minted in series are issued, the latter will be considered fungible, hence appropriate as a means of payment, ergo they will be subject to requirements.
What You Should Know
The move puts the EU a step ahead of the U.S. and U.K., which are yet to bring in formal rules for the crypto space. A U.K. official on Monday said specific crypto regulation could come into force within a year or so.
Once the EU laws come into effect, crypto companies will be able to use their licenses in one European country to “passport” their services across various member states. Crypto companies have been scrambling to obtain licenses from various European authorities and open new offices in anticipation of the law coming into effect.
U.S. crypto companies have been looking abroad for expansion in response to tough regulatory moves on their home turf. Recently, the Securities and Exchange Commission issued Coinbase with a Wells notice, which is often one of the final steps before the regulator formally issues charges, last month.
On Thursday, Coinbase CEO Brian Armstrong told CNBC at a fintech event the company is prepared for a “years-long” legal battle with the SEC. He said separately in a talk on stage that the U.S. “has the potential to be an important market in crypto” but right now is not delivering regulatory clarity. If this goes on, he said, then Coinbase would consider options of investing more abroad, including relocating from the U.S. to elsewhere.
What they are saying
In a tweet, Changpeng Zhao, CEO of the world’s largest crypto exchange Binance, said his company was “ready to make adjustments to our business over the next 12-18 months to be in a position of full compliance.”
It is important to know that Binance is under intense scrutiny from regulators over how it operates. In March, the Commodity Futures and Trading Commission sued Binance, Zhao, and Binance’s former chief compliance officer, Samuel Lim, alleging the company actively solicited U.S. users without permission. However, Zhao hailed MiCA as a “pragmatic solution to the challenges we collectively face.”
Andrew Whitworth, the EMEA policy director for blockchain firm Ripple, said the parliamentary blessing marked “an important milestone for the crypto industry around the world.” He further stated, “Consistency in implementation around the EU will be key in providing crypto companies with the operational clarity to fuel innovation across Europe and guard against unwitting fragmentation of the Single Market. As part of this, there is a need to ensure that the legislation is applied proportionally with regards to how different companies’ crypto offerings are treated, based on the risk profiles of their activities.”
Conclusion
Regulators have sought to rein in the crypto market in the wake of numerous catastrophic industry failures. In May, terraUSD, a controversial stablecoin project, unraveled in a $60 billion flameout after investors lost confidence in its technical underpinning. The demise of terraUSD caused a chain reaction in the industry, with various other firms, including Three Arrows Capital, BlockFi, and Voyager Digital going bust as well. FTX, formerly the fourth-largest crypto exchange, filed for bankruptcy in November in the most high-profile crypto industry failure to date.
With the EU taking this bold step, it is expected that more countries, like the U.S., and leading African nations in the cryptocurrency space like Nigeria and South Africa, will be encouraged to make bold regulations for the industry sooner rather than later.