The EU’s new crypto rules

The growth in popularity of cryptocurrencies and digital assets has been considered evidence of a broader trend toward diversity in the finance sector, as well as innovations which bring much-needed choices and solutions to meet the needs of now and future needs.

But the lack of legal clarity and certainty has, up until recently, clouded the sector. Recognising the sector’s potential, regulators have responded by creating frameworks and laws to help protect those involved while nurturing growth. For example, the EU released the Markets in Crypto-Assets (MiCA) provisional agreement and the US, the Framework for International Engagement on Digital Assets in the US, along with other laws at a country level, such as in Malta.

In the future, increased adoption of cryptocurrencies, stablecoins and even digital central bank currencies will likely correlate to the scope or regulations within certain jurisdictions. As legal frameworks tend to impact economic uptake significantly, regions like the US and the EU are already ahead of the game, providing a blueprint for others to follow in their footsteps.

At the end of June 2022, the European Parliament and the European Council Presidency, held by France, reached a provisional agreement regarding markets in cryptocurrency assets, otherwise known as MiCA. The proposal covers those that issue unbacked crypto assets and stablecoins, as well as providers of wallets and trading platforms. The set of regulations is designed to provide safeguards for investors and enforce financial stability while fostering innovation and the attractiveness of the cryptocurrency sector.

“Recent developments in this quickly evolving sector have confirmed the urgent need for an EU-wide regulation. MiCA will better protect Europeans who have invested in these assets and prevent the misuse of crypto-assets while being innovation-friendly to maintain the EU’s attractiveness. This landmark regulation will end the crypto wild west and confirms the EU’s role as a standard-setter for digital topics,” said Bruno Le Maire, French Minister for the Economy, Finance and Industrial and Digital Sovereignty.

The package also aims to provide further clarity across the 27, as some states have already moved ahead with crypto legislation, leading to a disparity.

At the highest level, MiCA will:

• Address that crypto assets typically fall outside the scope of EU financial services rules and that there are no definite rules for crypto assets, including their exchange against fiat currency or their custody.
• Focus on crypto asset services such as operating a trading platform, custody and administration, placement, trading, and providing advice on cryptocurrency assets.

Other milestones resulting from MiCA include laying down rules that eMoney tokens can only be issued by credit institutions and electronic money institutions and defining activity-based regulations between credit and e-Money institutions and, of course, other crypto asset service providers. Additionally, there would be a EUR 200 million daily cap on stablecoin transactions to ensure bank-style reserves and, thus, stability. Lastly, it would set liabilities for issuers if they lose the assets of their users.

Experts believe that aligning with institutions in this way could help lessen possible risks to financial stability and reduce the cryptocurrency market's well-publicised volatility.

MiCA also established bloc-wide rules for cryptocurrency assets and abides all issuers to publish a comprehensive white paper detailing all technical aspects of their coins. These whitepapers must also be registered with the relevant authorities.

The European Commission came forward with the MiCA proposal on 24 September 2020. It is part of the larger digital finance package, which aims to develop a European approach that fosters the technological development and ensures financial stability and consumer protection, according to a statement published by the EU.

The EU vs US race is on.

Across the pond in the US, the Department of the Treasury issued its framework almost simultaneously. Its framework for international engagement on digital assets facilitates collaboration between the G7, the G20, the Financial Stability Board (FSB), the Financial Action Task Force (FATF) and the Egmont Group of Financial Intelligence Units (FIUs), the Organization for Economic Cooperation and Development (OECD), Other Standard-Setting Bodies (SSBs), the International Monetary Fund (IMF), The World Bank and other Multilateral Development Banks (MDBs) and other stakeholders.

The creation of these collaborative frameworks demonstrates a significant step forward in allowing cryptocurrencies to become a regulated part of the economy. It also promotes better global cooperation by creating standards that work for all involved.

However, there are still some concerns, particularly from the US. While both bills are yet to be finalised, it is estimated they will become law sometime between December 2022 and January 2023- a speed considered a little too fast by some. In particular, the rate at which the EU tabled and approved the laws is unnerving US counterparts, who now feel pressured to speed up their processes.

This is also because the EU is working on other crypto-related projects, such as revised AML regulations, an NFT report, a DeFI pilot, and even Digital Euro Legislation.

There is no doubt that the cryptocurrency sector needs to be regulated. It will bring much-needed certainty and stability while increasing consumer confidence in investing in crypto and using crypto-related products. The key is ensuring that it does not become over-regulated. If regulators move to lay down frameworks without fully understanding what they are doing and its implications, the sector could soon be crippled. While there is a need to protect those involved, this should not get to a point whereby it is no longer fit for purpose.

At Fast Offshore, we believe in doing things by the book. We work with various crypto and blockchain companies in setting up exchanges, payment providers, gambling sites, and other kinds of businesses with these technologies at their core. From company incorporation to compliance, payments, structuring and licensing, our team can manage every aspect. As an entrepreneur, the changing regulatory landscape can be rather daunting, and that is why you need a professional on hand to help you navigate the waters.

Contact a member of our team today to learn more about setting up a crypto business or the latest rules and what they could mean for you.