EU authorities agree on rules to tame ‘Wild West’ crypto market

European authorities have reached a milestone deal to regulate the trading of crypto assets in the bloc, to rein in what lawmakers call the “wild west” of financial markets. These standards are designed to protect consumers and increase transparency from companies.

EU member states and the European Parliament on July 1 settled the terms of rules that aim to protect consumers while allowing the nascent market to flourish.

The rules, known as the Regulation on Markets in Crypto-assets (MICA), represent the first effort to impose standards throughout the bloc, rather than a patchwork of national rules.

This move followed a severe crypto market crash that dealt a powerful blow to lending platforms, exchanges, and fund managers. Since November 2021, popular crypto tokens have plummeted more than 70% in value, and the size of the market itself has fallen two-thirds to less than $1 trillion.

Bruno Le Maire, French finance minister, noted:

“Recent developments on this quickly evolving sector have confirmed the urgent need for an EU-wide regulation.”

These rules mean a crypto-asset service provider will require authorization from one of the EU’s national markets regulators, allowing it to passport its services through the bloc. Local regulators will share information with the pan-European regulator, Esma.

“We will have a new crypto-sheriff in the EU,” Spanish MEP Ernest Urtasun said, adding the union was “moving from the wild west of unregulated and risky digital assets to a safer crypto sphere.”

According to the new rules, regulated companies will not only face tougher standards to protect consumers but be liable in the event they lose investor funds. The industry also has to disclose information on its environmental impact.

Stablecoin issuers will be required to have a presence within the EU and have a “sufficiently liquid reserve.” They will be overseen by the European Banking Authority. While NFTs have been excluded from the rules unless they fall under existing categories of crypto assets.

The European Commission plans to reassess the proposals over the next 18 months.

James Kemp, managing director at AFME, a lobby group for investment banks, said: “This will bring regulatory certainty, reduce fragmentation and underpin the development of a robust and well-functioning market.”

However, Kemp added that lawmakers needed to clarify some points, such as the legal requirements for custodians of crypto-assets.

A day before this milestone regulation, authorities agreed on the Transfer of Funds Regulation (ToFR), which imposes renewed compliance standards on crypto actors to crack down on money-laundering risks within the industry.

According to Valeria Cusseddu, policy adviser at the European parliament’s committee on economic and monetary affairs, under ToFR, crypto companies would also “have to adopt internal policies and procedures to comply with targeted financial sanctions.”

“The crypto sphere is rife with risk and open to abuse and attack. We want to ensure that investors will have guarantees of protections for their assets and privacy, and we avoid cases like the recent crypto-crash with retail investors losing all of their money because of badly designed products or scams,” Urtasun stated.

Meanwhile, Robert Kopitsch, secretary-general of the Blockchain for Europe lobby group that includes the major exchanges Binance and Crypto.com, said the rules were “a mixed bag,” adding the group feared “that stablecoins will basically have no ways to be profitable.”

However, Coinbase Global Inc., a major global crypto exchange, said in a blog on Friday the comprehensive new framework was “exciting,” providing regulatory certainty to the market and raising industry standards.

“A harmonized single set of rules for the entire EU will enable us to invest, accelerate, and scale our growth efforts across the entire bloc.”

AFME, a financial markets industry body, said the rules would reduce fragmentation and underpin the development of a robust and well-functioning market.

More clarity is needed, however, to ensure that custodians of crypto assets are only on the hook in cases of negligence or misconduct and not for events beyond their control, such as a nation-state hack, AFME said.