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Is Europe now the friendliest place for crypto?

The EU has agreed on new landmark rules to regulate the cryptocurrency market, making it the most comprehensive regulatory framework for crypto in the world.

By Zosia Wanat and Amy O'Brien

EU legislators have reached an agreement on new regulations that they say will “put order in the Wild West of crypto assets”. The rules plant Europe firmly ahead of the US and the UK in the race to regulate crypto. 

The two deals brought the negotiations on the laws to an informal close. Now they have to be voted on by the European Parliament and get a sign-off from EU governments. The European capitals will then have two years to implement them in the national legislation.

What are the new rules?

Two deals struck this week — on the law called Markets in Crypto-Assets, or MiCA, and a bill on transparency of crypto assets transfers — will put new requirements on exchanges and issuers of stablecoins and will force crypto asset service providers to gather information about the transfers they operate to prevent money-laundering. The EU says that the new laws are put in place to protect those who invest in crypto assets and to provide more clarity for businesses in the fragmented European market. 

Who will the new rules affect? 

  • Issuers of stablecoins — The likes of Tether (USDT), Binance USD (BUSD) and USD Coin (USDC) that aim to peg their value to fiat currencies like the US dollar. The EU has shown a laser focus on these providers, in the wake of the collapse of the stablecoin terra last month. Just like lenders for national currencies, they will now be required to hold significant liquid reserves — partly in the form of deposits — to hedge against mass withdrawals, i.e. “bank runs”. They will also be capped at €200m in transactions a day.
  • Crypto exchanges — The most relevant — and contentious — new rule for crypto exchanges is that transfers of more than €1,000 between crypto exchanges and so-called “unhosted” wallets (which are held by an individual rather than an exchange or financial institution) will now need to be reported to regulators. This rule is likely to be unpopular among crypto exchanges because no such equivalent exists for fiat currencies. It’s a move designed to reduce anonymity, and thus money laundering, through crypto transactions.
  • Crypto trading platforms — Although the new rules don’t apply to tokens like bitcoin themselves, the trading platforms that people use to trade such tokens will now need to clearly warn users of the risks of losses from these transactions.
  • All crypto firms will now be accountable for their climate footprint, and will have to disclose their energy consumption to regulators. Energy-gobbling crypto mining has not, however, been banned.

But they don’t affect NFTs …

  • For now, non-fungible tokens (NFTs), which represent the digital ownership of assets and are mainly used in applications like virtual art, are excluded from the new rules. The EU Commission is assessing whether these require a separate regulatory framework and will decide within 18 months. 

What the industry is saying

Steven Eisenhauer, chief compliance Officer at Ramp, says: “Ramp welcomes this long-awaited development, especially its clarification of the applicability of the existing AML [anti-money laundering] regulations and creation of a passportable authorisations regime.

“While some concerns remain regarding the planned implementation of the transfer of funds rules, we are cautiously optimistic of what MiCA will mean for crypto in Europe.”

Petr Kozyakov, CEO of Mercuryo, says: “The provisional agreement by EU regulators is a welcome step in the right direction. I hope that other regulators will follow suit and work together with industry leaders to deliver a clear and effective global framework which will allow the sector to flourish.”

Katie Fry-Paul, crypto regulatory expert at law firm Taylor Wessing, says: “The UK government will be watching industry reactions to MiCA with interest, as it looks to make the UK a ‘crypto-hub’. The provisional agreement on MiCA may give the UK an opportunity to gauge industry views, and take advantage of its agility to take swift action.”

Sifted’s take 

The majority of crypto firms that Sifted spoke to welcomed the new rules — they’ve been a long time coming, and they offer these firms the clarity they’ve desired to make sure their activities are compliant. The industry also views regulation as the gateway to widespread adoption of crypto assets.

One of the biggest fears that crypto firms had was that the EU would ban transactions with “unhosted” wallets altogether. While they will be somewhat relieved that Brussels has not gone this far, the reporting requirements for transactions above €1,000 will be a major sticking point.

But overall, crypto industry players are reacting positively to the EU’s MiCA efforts, which they say place the region firmly ahead of the UK and US when it comes to regulation of the industry.

Zosia Wanat is Sifted’s central and eastern Europe reporter, soon to be based in Warsaw but currently in Brussels. She tweets from @zosiawanat

Amy O’Brien is Sifted’s fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter you can sign up here

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