EU lays Crypto Regulations: What You Need to Know

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By A D

On 20th April, 2023, the European Parliament approved a set of new regulations known as Markets in Crypto Assets (MiCA), making it the world’s first comprehensive framework for cryptocurrency regulation. The new legislation is designed to provide clarity and transparency for both the crypto industry, reducing risks of money laundering, and enhancing investor protection.

MiCA will establish a regulatory framework for crypto assets and will require issuers to obtain authorisation from their national regulator before launching a crypto asset. This regulation will allow EU Member States to supervise and control the activities of digital asset service providers, such as exchanges, custodians, and wallet providers.

MiCA regulation has been in development since 2019. The European Commission consulted with various stakeholders, including industry representatives, consumer associations, and national regulators, in the process.

Under the MiCA framework, stablecoins will be subject to the same regulatory requirements as other crypto assets, and issuers of stablecoins will be required to hold reserves to back the stablecoin at a ratio of atleast 1:1. The regulation also introduces a new category of digital assets called e-money tokens, which will be subject to the same rules as e-money, including mandatory deposit protection schemes.

This new legislation will also require digital-asset service providers to apply anti-money laundering (AML) and counter terrorist financing (CTF) rules, ongoing monitoring of transactions. Additionally, the rules will set out capital requirements for digital asset service providers, which will be based on the nature of the activity and risks involved.

esma headquarters . they are helping with crypto legislation in the EU.
The European Securities and Markets Authority (ESMA) is providing guidance and coordination in EU’s crypto framework.
Image Courtesy: bizz buzz

The MiCA framework will provide a clear legal frameowrk for crypto assets, lessening risk of fragmentation across the EU’s 27 Member States, with the European Securities and Markets Authority (ESMA) providing guidance and coordination. This allows greater legal certainty for crypto service providers and promotes innovation in the sector. This development brings anticipation of greater investments in the crypto sector, thereby boosting economic growth and creating jobs.

The EU’s move to regulate cryptocurrencies comes as other countries, including the United States, China, and Russia, are also considering similar frameworks. However, the EU has been able to move more quickly due to its regulatory structure and coordination among its member states.

Along with the MiCA regulation, the EU has also provided a separate regulation aimed at improving the supervision and regulation of central counterparties (CCPs) that clear significant amounts of euro-dominated derivatives. The regulation, known as the Central Counterparties Recovery and Resolution (CCP R&R) Regulation, is designed to ensure that CCPs can withstand financial shocks and continue to operate even in the event of a member default.

the eu parliament in session. they voted for crypto regulation.
The EU parliament in session. Image Courtesy:DW

As with any move in a large spread industry like crypto, the MiCA framework is not without its critics. Concerns have been raised over regulations possibly stifling innovation and imposing undue burdens on smaller businesses. Stringent requirements for capital and AML/CFT obligations could make it more difficult for new businesses to enter the market, leading to a concentration of power among a small number of established players.

Another potential issue is that the regulation may not go far enough in addressing some of the risks associated with the crypto industry. The regulation does not address the issue of crypto price volatility, which can be a significant risk for investors. And, the framework also does not include any provisions for the regulation of decentralised finance (DeFi) platforms, which are becming increasingly important part of the crypto ecosystem.

Europe is the largest destination for cryptocurrency funds, having accounted for 25% of all cryptocurrency transactions in 2022. The MiCA framework is expected to have a significant impact on the much debated regulation front in the global crypto industry, with some experts suggesting that it could become a template for other countries to follow. The legislation is expected to come into effect in 2024, giving businesses and regulators time to adopt to the new rules.

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