Agreement reached on European crypto-assets regulation
Markets in crypto-assets (MiCA) and Transfer of funds regulation (TFR)
At the end of June 2022, a years-long power struggle over the regulation of crypto assets at the EU level came to an end. By doing so, the EU sets the course for a cross-continental regulatory framework for crypto-assets, crypto-assets issuers, and crypto-asset service providers (CASPs).
The new legal setup covers the areas of transparency, disclosure, authorization, and monitoring of transactions by service providers. It aims to create a uniform approach across all 27 member states. The negotiations are at the stage of a preliminary compromise and are expected to reach a final conclusion during the Czech Council Presidency. The introduction at the EU level could put pressure on the USA and the UK to catch up as quickly as possible.
The regulatory framework aims to protect investors and preserve financial stability while allowing innovation and fostering the attractiveness of the crypto-asset sector. For the industry, the agreement reached in the negotiations means the long-awaited legal certainty. However, the regulations will also force companies to increase their organizational costs.
Many industry-feared reforms did not receive majority support. For example, the agreement does not affect Peer-to-Peer transfers. The proposal to limit Proof-of-Work for ecological reasons likewise did not prevail. Mining of Bitcoin was not banned, and non-fungible tokens (NFT) are not covered by the new MiCA regulation (yet this has also been met with criticism from NFT companies).
The Crypto industry criticized the regulation on privacy grounds. The EU has agreed that the General Data Protection Regulation (GDPR) will continue to apply to money transfers and that no separate data protection regulations will be introduced. This will likely need to be addressed by specific legislation.
Markets in Crypto Assets (MiCa) can be understood as a general legal framework with environmental implications and requirements on exchanges and issuers of stablecoins. The Transfer of Funds Regulation (TFR) includes specified measures against terrorist financing and money laundering in the crypto sector. It will force crypto asset service providers (CASPs) to gather information about the transfers on their platforms.
Markets in Crypto Assets (MiCA)
The European Council, Commission, and Parliament have come to an agreement for MICA. This regulatory framework was created in 2018 to establish a standard licensing system across all EU member states by 2024.
- Under MiCA, CASPs will need a license in order to operate in the EU. National authorities will be required to issue authorizations and report the information to the European Securities and Markets Authority (ESMA).
- The ESMA will develop draft regulatory standards, and the European Banking Authority (EBA) will be tasked with maintaining a public register of non-compliant CASPs. ESMA will be given the power with MiCA to ban or restrict crypto platforms if they do not adequately protect investors or even threaten financial stability.
- MiCA prohibits a CASP from offering to the public or seeking admission to trading crypto assets unless the issuer is a legal entity and a white paper complying with the regulation has been prepared, notified to the relevant local regulatory authority, and published.
- MiCA is not expected to impact non-issuer tokens such as Bitcoin. However, trading platforms will need to warn consumers of the risk of loss when trading digital tokens, similar to other assets.
- MiCA contains specifications on stablecoins. Under the new rules, stablecoins must maintain sufficient reserves to meet redemption requests in the event of mass withdrawals. These security measures are likely rooted in the market uncertainties as a result of the problems at Tether (USDT). Stablecoins that become too large (systemically important) must also expect their transactions to be capped at 200 million euros per day.
- Crypto service providers are required to disclose the environmental footprint of their assets.
Transfer of Funds Regulation (TFR)
Alongside MiCA, Brussels also agreed on the Transfer of Funds Regulation (TFR). This package of rules implements the EU measures against terrorism funding and money laundering in the Bitcoin space and requires services to provide identifying information on all digital asset transactions (“Travel rule”). Presented as part of the future European AML/CFT legislative package, the TFR aims to regulate the transfer of crypto-assets to avoid illicit flows and consists of an adaptation of the existing TFR rules currently applying to cash transfers only.
- The ban on so-called “unhosted wallets” that do not belong to a crypto service provider is off the table, but Crypto exchanges will instead have to verify once that the wallet belongs to their customer. The thresholds (between 0 and 1,000 euros) will apply depending on whether the transfers occur between CASPs, between CASPs and unhosted wallets, or between unhosted wallets.
- If a customer sends or receives more than 1000 euros to or from their own un-hosted wallet, the CASP will need to verify whether the unhosted wallet is effectively owned or controlled by this customer. Therefore, anonymous payments are effectively banned.
- The rules do not apply to person-to-person transfers conducted without a provider, such as bitcoins trading platforms, or among providers acting on their own behalf.
Next steps in the policy pipeline:
- Earlier this month, on October 5th, the The Committee of Permanent Representatives (COREPER) has approved the final version of the Markets in Crypto Assets (MiCA) legislation.
- After that, the agreement must be approved by the Economic and Monetary Affairs and Civil Liberties and Justice Committees and Parliament as a whole. The relevant parliamentary committee will meet again on October 10th.
- The European capitals will then have 18 months to implement them in the national legislation.
- Within 18 months, the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate, and horizontal legislative proposal to create a regime for NFTs and address the emerging risks of such a new market.
- The legislative package is expected to come into force until 2024.
Implications for the sector
Industry insiders compare the impact of MiCA and TFR on the crypto industry to that of GPDR on data privacy. MiCA and TFR will contribute to the consolidation and institutionalization of the industry, which firms need to consider in their strategic planning. Companies already active in the EU will have to take a number of actions to ensure compliance with the newly applicable rules. Companies that have not previously been active in the EU market can venture their entry with less risk, given the legal certainty that MICA and TFR create.
Due to spill-over effects, other countries, such as key markets like the US and UK, could follow with similar regulatory corsets. Therefore, it is likely that the entire industry will have to prepare for more regulatory measures. At the same time, companies from the crypto sector can prove legal integrity to investors and customers and substantiate their reputability argumentatively. Illegitimate and illegal transactions will presumably become less critical in the generation of value so that, on the one hand, there will be a shakeout of the market, and, on the other hand, the remaining players will be able to act as self-confident financial companies.
However, the question arises as to whether corresponding regulations will be developed cooperatively or competitively. If the states overlap or contradict each other in their regulatory measures, this could present companies with existential problems. This is where unification efforts by supranational bodies such as the G7 would be required.