Europe Establishes Cryptocurrency Framework. Part 1: The European Union

    05 Apr 2022

    We looked at two landmark documents pertaining to cryptocurrency legalization in Europe: the EU Markets in Crypto-Assets regulation (MiCA) and a similar paper from the central bank of Great Britain. These massive and extremely substantive pieces consist of hundreds of pages outlining the European vision of cryptocurrencies’ role and place in the modern world and the future European financial system.

    On March 14, the European Parliament Committee on Economic and Monetary Affairs (ECON) adopted a cryptocurrency bill called Markets in Crypto-Assets regulation (MiCA) by a majority vote. Forty-five committee members voted in support of the document, with five votes against and seven abstentions.

    “A great day for the crypto sector! The EU Parliament has paved the way for innovation-friendly crypto regulation that can set global standards. The process is not over yet; there are still steps we have to take,” committee member Stefan Berger tweeted. “Emphatic support for the regulation shows the EU Parliament favoring a technologically advanced and innovative financial sector.”

    The legislation will be discussed further at the level of the Council of the EU and the European Commission. Such fundamental laws in Europe take a lot of time to adopt – just recall that the document in question was originally introduced on September 23, 2020. Back then, the European Commission published a Digital Finance Development Package, consisting of a Digital Finance Development Strategy and bills to regulate crypto assets and cybersecurity. The central part of the Package was the MiCA bill, finalized by the parliament in the autumn of 2021. Now, it will form the basis for transforming the cryptocurrency regulation framework of the EU member states.

    As we have come to expect, Europeans, above all, want to minimize any kind of risk. Hence, the primary goal in developing MiCA, according to the document’s authors, was to coordinate legislation for issuing cryptocurrencies and performing operations with crypto assets, as well as eliminating regulatory fragmentation, which creates loopholes for potential fraud.

    The key provisions agreed upon by MEPs for those who issue and trade crypto assets (including asset-referenced tokens and e-money tokens) cover transparency, disclosure, authorization, and transaction oversight. They are supposed to better inform consumers about the risks, costs, and commissions associated with cryptocurrencies. In addition, the new legislation will support market integrity and financial stability by regulating public offerings of crypto assets. Finally, the bill includes measures against market manipulation, money laundering, terrorist financing and other criminal activities.

    Of course, those restrictions strip cryptocurrencies of some of their most attractive properties – anonymity and lack of supervision by government authorities and banks. Then again, we will see who laughs last. It’s still far from certain that European bureaucrats will manage to crush the core values of freedom embedded in blockchain technology.

    In the meantime, MEPs want – based on the text of the bill – the European Securities and Markets Authority (ESMA) to control the issue of asset-referenced tokens and the European Banking Authority (EBA) to manage tokens used for financial settlements.

    One of the reasons this document appeared in the first place is the fact that right now, crypto assets, including cryptocurrencies, are not issued or backed by either the Central Bank or government agencies. It leaves them outside the jurisdiction of the EU law, in a kind of “gray zone”. And while this may not concern you and me, European bureaucrats insist that this state of affairs creates risks for consumer protection and financial stability and can lead to market manipulation and financial crimes.

    The bill identifies three main groups of crypto assets:

    – utility tokens that provide access to services or applications;

    – asset-referenced tokens (ART) linked to the value of assets;

    – e-money tokens (EMT) pegged to fiat currencies.

    At the same time, security tokens – crypto assets with features of securities – will not be subject to MiCA, continuing to fall under the financial services legislation.

    The document especially focuses on stablecoins, defining them as ARTs and EMTs since their worth depends on the value of fiat, gold, other crypto assets, etc. MiCA allows stablecoins to be used only as a means of payment, with specific requirements, including:

    – obtaining a separate issuing license;

    – additional approval of the issue;

    – a regulator-approved white paper that meets specific criteria;

    – requirements for the issuer’s capital size, transparency, etc.

    The law also provides separate specific requirements for ART and EMT.

    Stablecoins’ value will be assessed by the European Banking Authority (EBA) based on a several factors, such as the number of crypto asset owners, the amount of transactions made, their total value, and the volume of cross-border transactions. Issuers of stablecoins deemed “significant” face additional liquidity requirements. Their operations will be subject to mandatory control by the collegial body (that includes the EBA) functioning as a supervisor.

    Crucially, the law defines two main entities – the issuer of crypto assets and the crypto asset service provider (CASP). The provisions for them were developed based on the Revised Payment Services Directive (PSD2) and the regulatory framework experience of Japan and South Africa.

    For example, an issuer of crypto assets will need to:

    – register a legal entity in the EU;

    – publish their white paper;

    – comply with professional standards.

    The service provider will be required to:

    – register a legal entity in the EU;

    – have a minimum authorized capital of 50,000 to 150,000 euros, depending on the business type;

    – obtain licenses for certain types of activities.

    Finally, the bill establishes conditions for combating market manipulation for companies dealing with cryptocurrencies. Among them are disclosure of insider information, a ban on insider trading, and restrictions on manipulating market indicators.

    Once the MiCA bill is passed, EU member states will need to reform their national laws by 2024, aligning them with the overarching EU requirements. However, given the swiftness of changes in the financial world, it will likely happen much faster.

    To be continued…

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