Political agreement for EU regulation of virtual currencies
Virtual currencies such as Bitcoin, Ethereum and Cardano are becoming increasingly important. They are not money but are used by an ever-growing circle of users as a means of payment and investment. However, central banks and supervisory authorities have identified risks and see a need for regulation. Challenges in the EU include consumer protection and the fight against money laundering and terrorist financing.
Therefore, crypto-assets and crypto-asset service providers shall be subject to strict regulation in the EU. In September 2020, the EU Commission had already presented a draft for a corresponding regulation. On 30 June 2022, representatives of the EU lawmakers (i.e. the European Parliament and the Council) reached in Brussels a provisional agreement on a European crypto-asset regulation on the markets in crypto-assets (hereafter “MiCa”). MiCa is intended to prevent abuse, market manipulation and insider trading in connection with digital currencies, to protect consumers and at the same time also to contribute to financial stability.
If MiCa enters into force, it would be directly applicable and would have a groundbreaking influence. Cryptocurrencies are currently hardly regulated at the international level. Particularly in the USA and the UK, there are no strict regulations despite the widespread use of cryptocurrencies compared to the EU. Some EU Member States have already enacted national laws for crypto-assets but MiCa is now to establish uniform rules on a European level. Also, the new regulation would create reliable licensing and supervisory structures for the first time.
Investments in crypto-assets are still considered highly risky and speculative. During the negotiations between the EU Member States, the European Parliament and the European Commission in recent months, there have been numerous debates about possible bans on cryptocurrencies based on the proof-of-work mechanism. This mechanism requires – to put it simply – a great deal of effort and computing power from computers to create a new block in the blockchain. It is therefore considered to be enormously power-intensive and thus harmful to the climate. Due to climate change, members of the European Parliament had therefore called for currencies based on this mechanism to be banned. Bitcoin, the best-known cryptocurrency, would also have been affected. However, the political agreement of 30 June 2022 comes without bans. Though, providers of crypto-assets will have to disclose energy consumption and environmental impact in the future.
Furthermore, the new regulation stipulates that crypto-asset service providers must comply with strict requirements to protect consumers’ digital wallets. Such providers shall be held liable if they lose their investors’ crypto-assets. Issuers of stablecoins will, according to the new rules, have to build up sufficient liquid reserves on a one-to-one ratio and partly in the form of deposits in order to be able to meet investors’ claims. In addition, crypto-asset issuers will have to have a registered office in the EU and will also be subject to supervision and monitoring there. According to the EU legislators, monetary sovereignty should thus be preserved.
Furthermore, crypto-asset service providers will in future require a license to be able to operate in the EU. To counteract money laundering risks, the European Securities and Markets Authority (ESMA) is to set up a public register for non-compliant service providers that offer services in the EU without authorisation or whose parent company has its registered office in a state that is on the EU’s list of non-cooperative jurisdictions in the areas of money laundering or tax evasion.
Non-fungible tokens (NFTs), i. e. digital assets representing real objects like art, music and videos, will be excluded from the MiCa’s scope except if they fall under existing crypto-asset categories. Within 18 months the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate, and horizontal legislative proposal to create a regime for NFTs and to address the emerging risks of such new market.
The provisional agreement is subject to approval by the Council and the European Parliament before going through the formal adoption procedure.
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