cryptocurrency and the law
Cryptocurrency Europe Weekend Read

Crypto’s Regulatory Grey Area Tackled by EU Following MiCA Legislation

For years, one of the biggest challenges cryptocurrency adoption faced was regulation. Trying to ensure anonymity whilst holding those responsible for illicit use has been a struggle. However, the EU has now passed legislation which will not only look to track crypto transfers but will also create common rules on the supervision, consumer protection and environmental safeguards of crypto-assets. This is called the Markets in Crypto Assets Legislation or MiCA for short.

MiCA will cover crypto-assets that are not regulated by existing financial services legislation. Key provisions for those issuing and trading crypto-assets (including asset-reference tokens and e-money tokens) cover transparency, disclosure, authorisation and supervision of transactions. The legislation was passed with 517 votes in favour to 38 against and 18 abstentions.

It should also be noted that this would mean consumers have a greater understanding of the risks, costs and charges associated with crypto. Hypothetically, should a crypto disaster like the FTX crumble or Terra Luna bankruptcy take place again, consumers will be better informed and protected before committing their money to the digital asset.

Ed Stittle, founder of ESDG Accountancy
Ed Stittle, founder of ESDG Accountancy

This sentiment was supported by Ed Stittle, founder of accounting firm ESDG Accountancy, who said: “Although like a lot of regulation, MiCA risks damaging innovation in the industry by limiting new entrants, the legislation is mostly welcomed by my clientbase.

“Crypto as an investment class has suffered recently through scandals such as FTX amongst others, causing falls in value – so this EU legislation is most welcome at reinforcing crypto’s competitiveness as an investable asset. This is necessary with any investment class which becomes more mature and attracts investors from a wider public.”

A milestone for EU crypto

The legislation is a milestone for regulators in Europe. Where previously crypto had been described as the wild west, law and order will now be brought into place. Speaking about the success of MiCA’s approval, Alisa DiCaprio, chief economist at blockchain firm R3 said: “Smart regulation for crypto like MiCA is critical in providing the required guidelines on how the underlying distributed ledger technology for these assets is applied.

Alisa DiCaprio, chief economist at enterprise blockchain firm R3
Alisa DiCaprio, chief economist at R3

“This will serve as a platform for future innovation which is vital as global competition across technology and financial services climbs. Europe is taking a major stride forward in positioning itself as a leader in digital finance innovation – also highlighted in the recent launch of its DLT Pilot Regime.

“Regulatory and legal certainty provide the core foundations for any emerging technology to be applied successfully. The fact that the EU is moving first to lay these foundations will undoubtedly make it an attractive destination for more companies in the space to set up and invest in. It would be a surprise if other jurisdictions like the UK and the US aren’t quick to follow suit and further accelerate their crypto regulatory efforts.”

Nikolay Denisenko, co-founder and CTO of Brighty app, a Swiss neo-digital bank said: “The acceptance of MiCA regulation in Europe marks a pivotal moment for the financial industry. It showcases the European Union’s progressive stance on embracing digital assets and fostering innovation within the fintech sector. As a neobank startup, we celebrate MiCA’s potential to streamline operations and improve consumer protection in the crypto market.

“The regulatory clarity provided by MiCA is instrumental in boosting investor confidence, thus accelerating the growth of the crypto ecosystem. Overall, MiCA paves the way for a more transparent, secure, and sustainable future for digital assets in Europe.” 

The travel rule

In June 2022, the EU Parliament agreed that crypto transfers, as is the case with any other financial operation, should always be traced, with suspicious transactions blocked. Following the legislation’s approval, the so-called “travel rule”, already used in traditional finance, will cover transfers of crypto assets. Information on the source of the asset and its beneficiary will have to “travel” with the transaction and be stored on both sides of the transfer.

Mark Foster, EU policy analyst at the Crypto Council for Innovation discussed the travel rule’s impact on crypto saying: “What is really valuable is the legal certainty MiCA offers to the crypto industry. There are clear rules for stablecoins and exchanges. These rules cover operations, including registration, reporting and disclosure, asset segregation, and capital requirements.

“Clarity at the international level will make a big difference. It could draw many companies away from the US, bringing new jobs and investment to the region. It’s also worth noting how the EU has handled newer parts of the ecosystem. Their ‘wait and see’ approach with DeFi and NFTs shows a thoughtful pause to further analyse and learn more about what these innovations can do.

“With the TFR, the EU is implementing the internationally agreed travel rule, bringing crypto into the regulatory perimeter when it comes to AML provisions. It is important that the soon-to-be concluded, broader EU AML package does not deviate from the TFR as this would bring unnecessary divergence and conflicting rules, particularly around due diligence for unhosted wallets.”

Comparing crypto regulation development across the pond

The cryptocurrency regulatory grey area has remained for such a long period of time due to the inability to define crypto. Is it a commodity or a security? Depending on who you ask, you get very different answers. For example, former SEC chairman Jay Clayton stated that both Bitcoin and Ethereum are not securities.

However, current SEC chairman, Gary Gensler, has explained that, with the exception of Bitcoin, cryptocurrencies are in fact securities. He stated: “Crypto financial assets have the key attributes of a security.”

While there has been confusion in crypto regulation in North America, the ruling of Judge Analisa Torres of the Southern District Court of New York on the SEC versus Ripple Corporation case will advance how cryptocurrency is governed across the US.

The knock-on effect

Sue Friedman, senior director, global policy, Ripple, the crypto payment protocol, told The Fintech Times how she believed would impact the crypto sector. She said: “The European Union’s approval of MiCA is a hugely important step for providing clarity to the crypto industry both in Europe and globally. While we’ll have to wait for the regulation to be fully adopted, this landmark decision is an important step forward in providing clarity for those already participating, and those planning to invest in the European crypto industry.

“It builds upon Europe’s early move in the space and highlights the need for continued momentum towards regulatory clarity globally.

“Longer term, MiCA should ensure a thriving crypto ecosystem that supports innovation and growth whilst building confidence in the utility of the technology. With the passing of MiCA, Europe has demonstrated global crypto leadership, and the announcement will serve to continue the momentum that has seen global crypto firms enthusiastically building businesses and innovating across the region.

“We look forward to seeing how MiCA will provide a blueprint for other jurisdictions to build out their own regulatory frameworks.”

Author

  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

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