As the market for cryptocurrencies and crypto-assets is growing at a frenetic pace, last year there were many discussions in the European Union about the rules and regulations related to them. On September 24, 2020 the European Commission has issued an important project affecting the Market of Crypto-assets in the European Union, namely the Proposal for the REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937.
What is the purpose of the proposal?
Due to the growing popularity of cryptocurrencies, there has occurred a need for increased regulatory scrutiny. There are different approaches to cryptocurrencies around the world regarding government regulations. The regulations in the new draft are designed to protect consumers from cyber-attacks, theft or malfunction on cryptocurrency exchanges. What is surprising – despite the emphasis on increased scrutiny and protection, the regulation does not mention a requirement for mandatory insurance against, for example, loss of assets due to fraud or cyber-attack.
Key assumptions of the project
The preamble of the document describes the assumptions and objectives of the project. First and foremost, this proposal is part of the EU’s “Digital Finance” package designed to support the potential of digital finance to innovate and compete while mitigating risk. The strategy is likely to significantly impact the operation of the crypto market in the EU. The proposal is in line with the Commission’s priorities to adapt Europe to the digital age. The digital finance package includes a new strategy for the EU financial sector. The aim of the previously mentioned strategy is to ensure that the EU drives the digital revolution and that innovative European companies play a leading role in it.
in addition, the package also includes a proposal for a distributed ledger technology-based market infrastructure pilot scheme, a proposal for digital operational resilience, and a proposal to clarify or amend certain related EU financial services legislation.
Key to the strategy is to ensure that the EU’s financial services regulatory framework is conducive to innovation and does not hinder the use of new technologies.
Since the publication of the Commission’s Fintech Action plan, in March 2018, the Commission has been examining the opportunities and challenges raised by crypto-assets. In 2017, there was a big jump in the market capitalization of cryptocurrencies. As a result, Executive Vice President Valdis Dombrovskis, in a letter to the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), urged them to renew their warnings to investors. The 2018 Action Plan included, among other things, mandating the EBA and ESMA to assess the applicability and adequacy of the existing EU regulatory framework for financial services to cryptocurrencies. EBA and ESMA highlighted that – apart from EU legislation to combat money laundering and terrorist financing – most cryptocurrencies fall outside the scope of EU financial services legislation. Consequently, they are not subject to legislation on, for example, consumer and investor protection.
Another reason why there is a need for regulation is that individual member states are introducing regulations on cryptocurrency-related issues, leading to market fragmentation.
Experts say regulation over-regulates stablecoins
Recently, a new subset of crypto assets has entered the market – the so-called ‘stablecoins’. They constitute the main focus of the regulation alongside cryptocurrency exchanges. Their value is tied to another asset, such as gold or another cryptocurrency. Their creation was intended to overcome the volatility of cryptocurrency prices. This is usually due to the fact that there is no solid mechanism to determine their true value. One of the purposes for which stablecoins are used is for owners to convert profits into stablecoins in the short term with the intention of investing in other cryptocurrencies when opportunities arise, rather than converting profits into fiat money and transferring it to their bank account. Besides, stablecoins are invested in cryptocurrency exchanges or decentralized financial applications to return interest and profit respectively. Cryptocurrency exchanges are a safe and attractive alternative to traditional savings methods offered by legacy finance. Customers are not forced to lock up their funds for a couple of years, and the annual interest can be much higher.
European Commission President Ursula von der Leyen emphasized the need for “a common approach with Member States to cryptocurrencies to ensure that we understand how to take full advantage of the opportunities they present and address the new risks they may pose”. In December 2019, the Commission and the Council jointly declared that they “are committed to establishing a framework that takes advantage of the potential opportunities that certain cryptocurrencies may offer”.
Four main objectives
The first objective of the proposal is to provide legal certainty. Given the speed at which cryptocurrency markets are developing, a robust legal framework that sets out the regulatory treatment of all cryptocurrencies that are not covered by existing financial services legislation is essential.
The second goal is to foster innovation. Promoting the development of cryptocurrencies and the wider use of DLT technology is not possible without the introduction of a clear set of rules to support innovation and fair competition.
The third objective is to put in place an adequate level of consumer and investor protection and market integrity. Crypto assets not covered by current financial services regulations carry many of the same risks as more familiar financial instruments.
The fourth goal is to ensure financial stability. While some cryptocurrencies are quite limited in scope and application, others, such as the emerging category of “stablecoins,” have potential. They have the opportunity to become widely accepted and potentially systemic. The proposal includes safeguards to address potential threats to financial stability and orderly monetary policy. It could arise from “stable coins.”
The proposal was drafted in accordance with existing policy provisions in this policy area. The proposal includes assurances that the existing provisions do not constitute obstacles to the deployment of innovative technologies. The regulations in the proposal are supported by long-term horizontal market monitoring and much international political work, for example, in such fora as the Financial Stability.
Consistency with other Union policies
President von der Leyen’s mission letter to Vice President Dombrovskis calls for a common approach to cryptocurrencies with member states to ensure Europe can make the most of the opportunities they present and counter the new threats they may pose.
This proposal supports a holistic approach to blockchain and DLT technologies that aims to put Europe at the forefront of blockchain technology innovation and deployment. It is closely linked to the Commission’s broader policy on blockchain technology. The work has included the creation of a European Blockchain Observatory and Forum and a European Blockchain Partnership. It brings together all member states at a political level, as well as the public-private partnership envisaged with the International Association for Trusted Blockchain Applications (https://inatba.org/ ).
This proposal is also consistent with the Union’s policy to create a capital markets union (CMU). It responds to the final report of the High Level Forum, which highlighted the under-exploited potential of cryptocurrencies and called on the Commission to provide legal certainty and establish clear rules for the use of cryptocurrencies.
We can also see consistency in the SME strategy adopted on March 10, 2020, which also highlights DLT and cryptocurrencies as innovations that can enable SMEs to engage directly with investors.
Most importantly, the proposal is fully consistent with the recommendation in the Security Union’s strategy to develop a legal framework for cryptocurrencies. It takes into account the impact of new technologies on the way financial assets are emitted.
Legislative path of the regulation
On 15 October 2020, the Parliament’s Committee for Economic and monetary affairs (ECON) appointed Stefan Berger (EPP/Germany) as the rapporteur for this file. The draft report made by him was presented on 25 February 2021. Then the review in the Council Working Party on Financial Services was ongoing. On 22 February 2021, the European Central Bank published its opinion on the file. On 2 March 2021, the European Economic and Social Committee published its opinion on the file.
Is regulation good for crypto?
Regulation could also make the cryptocurrency market less susceptible to manipulation, which could increase the value of cryptocurrencies. In the short term, the regulation may cause the trading value of cryptocurrencies to fluctuate, but in the long term, the regulation, if enforced correctly, is expected to stabilize the market and make it a safer investment.
Although MiCA will bring a lot of changes to the world of cryptocurrencies, the European Commission has ensured that it will not hinder the development of modern technology in any way. In addition, MiCA will NOT apply to crypto-assets that qualify as: financial instruments, such as Bitcoin. We can be also sure that the EU will not ban crypto .
What the EU’s new MiCA regulation could mean for cryptocurrencies | EUROPP (lse.ac.uk)
EUR-Lex – 52020PC0593 – EN – EUR-Lex (europa.eu)
MiCA – Markets in crypto-assets regulation | Legislative train schedule | European Parliament (europa.eu)
MiCA: A ‘beta version’ of crypto-assets regulation in the EU – CityAM : CityAM
New Crypto Rules in the European Union – Gateway for Mass Adoption, or Excessive Regulation? – RegTrax – Stanford Law School
Can Bitcoin Regulations Make Cryptocurrency Safer? (thebalance.com)