Since then, regulators in the EU and elsewhere have raced to catch up with the rapid growth of the crypto industry. Their task has been made difficult by the dizzying speed at which the industry has expanded, not only in terms of capitalization, but also in regards to the evolution of blockchain technology.
The need for effective regulation has been underlined by several high-profile money laundering cases as well as the penetration of illicit funds into global and European markets. Cryptocurrency exchanges, which serve as the gateway to crypto for the majority of cryptocurrency owners, are a particular focus for EU regulators.
Why do crypto exchanges need regulation? As the global financial system is becoming increasingly interconnected with crypto, this raises concerns about their impact on the stability of the global financial system, especially in light of the high volatility of cryptocurrencies. We are at a point where the occasional price collapse of some cryptocurrencies affects large groups of people and spills over into conventional financial markets.
For some time, cryptocurrency has been seen as a tool for global financial diversification, but that is not always the case. Earlier this year, the International Monetary Fund (IMF) released data indicating a correlation between Bitcoin and the S&P 500. This was demonstrated in 2020 when the stock market crashed in the wake of the COVID pandemic, with a correlating crash in the price of most cryptocurrencies.
The nature of the underlying technology for cryptocurrencies is such that it enables cross-border transactions without the need for any existing financial intermediaries. This allows criminals, terrorists, corrupt politicians or other bad actors to transfer money across the world without the risk of being detected by governments.
New applications and models such as tokenization, decentralized finance, NFTs (non-fungible tokens), and decentralized autonomous organizations challenge traditional models that outline who is currently considered a “person,” what is “value” and how this “value” can be transacted.
This threatens to come into direct conflict with existing regulations pertaining to cross-border data flows, intellectual property rights, and capital controls. It could also lead to ambiguity in the taxation environment, as well as pose a host of other policy concerns.
The potential implications of cryptocurrencies for global financial stability, and the distinctive nature of the underlying technology, highlight the importance of prioritizing regulatory discussions and decisions - at both national and global levels.
A brief history of cryptocurrency regulation in the EUCryptocurrencies have been recognized among EU institutions since 2012, when the body wrote about them as a growing trend. Since then, the Union has continued to release guidance, trend analysis, and regulations about these digital assets. Some of the earliest crypto exchanges in the EU were located in countries such as Slovenia, Malta and Estonia.
Throughout 2017, many crypto projects launched crowdfunding events known as initial coin offerings (ICOs), which, similarly to an initial public offering (IPO), involved the sale of tokens (in lieu of shares) to the general public. 2017 was the year of Bitcoin’s first serious bull run, and with it many other altcoins also rose in value, which made ICOs very attractive for speculative investors.
Of course, being completely unregulated, many ICOs ended up being scams or saw the value of their token crash quickly following their launch. The market gradually ‘sobered up’ towards the end of the year, but the damage was done. Calls for regulation started being made, some coming from the crypto community itself and others from politicians who were realizing the growing potential of crypto.
In 2018, the EU started formulating the 5th Money Laundering Directive (5AMLD). This directive aimed to regulate all crypto exchanges and track suspicious transactions. It is also important to note that historically, most crypto regulations in Europe were formulated at the EU level rather than at the country level. However, certain European countries have begun regulating crypto individually, one example being France, which developed its own guidelines starting in 2019.
In January 2020, the European Commission (EC) announced a public consultation initiative, seeking guidance on where and how crypto assets fit into the existing EU cryptocurrency regulation framework. The Commission followed up in September 2020 with a new proposal known as the Markets in Crypto-Assets Regulation (MiCA). The proposal set out draft regulatory measures for cryptocurrencies, including the introduction of a new licensing system for crypto-asset issuers, industry conduct rules, and new consumer protections.
Later on, in December 2020, the 6th Anti-Money Laundering and Counter-Financing Directive (6AMLD) was announced. Crypto firms across the EU had to comply with this directive by June 2021. This new directive focused on toughening criminal penalties and expanding the scope of the existing legislation. Under the 6AMLD, criminal liability has also been changed to include the prosecution and punishment of legal persons.
EU crypto regulation today The EU is working on new rules to boost the potential of crypto-assets and curb the threats. members of the European Parliament (MEPs) have reviewed and amended the EC's proposal and in March 2022, decided to begin negotiations on the final shape of these rules with EU countries in the Council.
To encourage the development and use of these technologies, the new rules aim to provide legal certainty, support innovation, protect consumers and investors and ensure financial stability.
These rules cover transparency, disclosure, authorization, and supervision of transactions. MEPs want the issuing of some of the tokens to be supervised by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA). Businesses dealing with crypto-assets will have to improve the way they inform consumers about risks, costs, and charges.
Most recently, the EU reached a provisional agreement on further AML rules for cryptocurrencies that compels crypto firms to check the identities of their customers and report ‘suspicious transactions’ to regulators. The new rule applies to all unhosted crypto wallets (those not managed by licensed crypto exchanges) as well as for transactions exceeding 1,000 euros made by licensed service providers. However, the question remains whether regulators can enforce these new guidelines for cryptographically-secured P2P transactions made between unhosted wallets.
Most crypto exchanges, including US-based Coinbase, have opposed the introduction of this newest regulation. In a letter sent to EU finance ministers, crypto exchanges have requested that the new regulations do not go over the standards set currently by the Financial Action Task Force (FATF), the intergovernmental AML organization.
By regulating public offers of crypto-assets, the rules would ensure financial stability, while other measures tackle market manipulation, money laundering, terrorist financing, and other criminal activities.
When you are choosing a crypto exchange, it is important to choose one that complies with EU regulations. It is evident that recent years have seen the EU taking significant steps to ensure that various types of digital assets are regulated, both to prevent them from being abused and to protect consumers. Today, it is more important than ever to choose a crypto exchange that complies with EU regulations.
Academic referencesFerrari, Valeria. "The regulation of crypto-assets in the EU–investment and payment tokens under the radar." Maastricht Journal of European and Comparative Law 27, no. 3 (2020): 325-342.Morton, D. Towne. "The future of cryptocurrency: an unregulated instrument in an increasingly regulated global economy." Loy. U. Chi. Int'l L. Rev. 16 (2020): 129.Szepesi, Laura. "Cryptocurrency exchange landscape in the EU How regulation impacts success of cryptocurrency exchanges." PhD diss., 2020.https://run.unl.pt/bitstream/10362/108486/1/16061_Laura_Szepesi_Cryptocurrency_exchange_landscape_in_the_EU_136101_1755312464.pdfInternet Referenceshttps://www.europarl.europa.eu/news/en/press-room/20220309IPR25162/cryptocurrencies-in-the-eu-new-rules-to-boost-benefits-and-curb-threatshttps://www.linklaters.com/en/insights/blogs/fintechlinks/2018/june/eu-opens-door-for-cryptocurrency-exchanges-to-apply-aml-ruleshttps://www.reuters.com/technology/eu-backs-crypto-anti-money-laundering-rules-crack-down-dirty-money-2022-06-29/https://sumsub.com/blog/crypto-france/