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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.
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.
Next steps in the policy pipeline:
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.