EU Sets First Rules to Regulate Cryptocurrencies
Agreement follows months of turmoil in the crypto market
European Union officials agreed on rules that would regulate the crypto market in the bloc, forcing platforms to seek authorization to operate and providing safeguards to users.
The agreement still needs to go through Brussels’ complex legal process and might not kick in until 2024. However, officials say it will make the EU the first broad region with common crypto-asset regulation in the world. Some countries have national legislation governing digital assets, but these would mark the first EU-wide rules.
While increasing the burden on crypto exchanges and issuers of cryptocurrencies, it will also make it easier for them to provide their services cross-border in the EU’s 27 member countries.
U.S. authorities are also grasping with supervision of the rapidly growing cryptocurrency industry. As of now, it is a patchwork system, with cryptocurrencies shoehorned into regulations for securities and commodities.
“The EU is [the] first to introduce comprehensive rules on crypto, I hope others will follow,” said European Commissioner for Financial Services Mairead McGuinness.
The EU agreement follows months of turmoil in the crypto market. In early May, stablecoin TerraUSD crashed, causing panic across the sector. Prices for bitcoin and other cryptocurrencies also tumbled. Lenders told customers they couldn’t take their money out, highlighting how unprotected investors are in a market that remains mostly unregulated.
Stablecoins are billed as the nonvolatile cousins of bitcoin, having values that are supposed to be pegged to $1.
Under the EU’s Markets in Crypto-Assets framework, or MiCA, agreed on late Thursday, investors will receive some protection. In a key feature, stablecoin issuers will have to maintain reserves that will cover for mass withdrawals and be based in the EU.
“This landmark regulation will put an end to the crypto wild west and confirms the EU’s role as a standard-setter for digital topics,” said Bruno Le Maire, France’s economy minister.
The collapsed TerraUSD wasn’t backed by hard-currency reserves, which meant holders weren’t guaranteed $1, the coin’s peg, even if its value plummeted.
Large stablecoins will also face a cap of about $200 million in transactions a day, European Parliament member Ernest Urtasun said in a Twitter thread laying out the plans.
Mr. Urtasun said for tokens without issuers, such as bitcoin, trading platforms will have to outline a coin’s technology and purpose, and be liable for any misleading information. They will also be obliged to lay out risks for consumers and obey rules on disclosure of inside information.
Dante Disparte, chief strategy officer at Circle Internet Financial Ltd., the issuer of USD Coin—a stablecoin backed by reserves—said that while the framework wasn’t perfect, he welcomed a “harmonized, comprehensive framework, across an entire region, that gives market participants regulatory clarity.”
The European Securities and Markets Authority will have powers to prohibit and restrict services provided by exchanges, and will be in charge of a register of noncompliant platforms.
Nonfungible tokens, known as NFTs, will be largely excluded from the framework. EU officials said the European Commission might come up with a separate proposal for these digital tokens, which prove ownership of digital assets like art, music and video.
The framework for now is poised to exclude decentralized finance, or DeFi, the umbrella term for financial services offered on public blockchains. This segment of the crypto universe has grown rapidly in the past two years. The recent decline in cryptocurrency valuations has sparked concerns about consumer protections, as some of these platforms have faced liquidity and stability issues.
European Central Bank President Christine Lagarde called in June for a second version of MiCA that regulates crypto-asset staking, where users lock up assets in return for higher yield, plus crypto lending and DeFi.
Rebecca Rettig, general counsel for crypto-lending platform Aave, said on Twitter that Aave plans to collaborate with policy makers as EU officials seek to broaden out regulation to govern DeFi platforms.
The commission proposed the MiCA framework in September 2020. It said it wants to foster innovation, while also providing strong protection for investors.
The framework must be approved by member states and the European Parliament before it begins an expected long process of writing guidelines and having the framework transposed to EU countries.