• European Union (EU) legislators voted 517-38, with 18 abstentions, to establish a new cryptocurrency regulation framework.
• Additionally, the European Parliament approved the Transfer of Funds regulation by a vote of 529-29
• Most lawmakers supported requiring crypto wallet providers and exchanges to obtain licenses to operate within the EU. They also agreed that stablecoin issuers should maintain adequate reserves.

On Thursday, European Union (EU) legislators voted 517-38, with 18 abstentions, to establish a new cryptocurrency regulation framework, Markets in Crypto-Assets (MiCA). This marks the first time a major global jurisdiction has implemented comprehensive cryptocurrency regulations.

Additionally, the European Parliament approved the Transfer of Funds regulation by a vote of 529-29, with 14 abstentions. This separate legislation mandates that cryptocurrency operators identify their customers to combat money laundering.

These decisions follow a debate held on Wednesday. Most lawmakers supported requiring crypto wallet providers and exchanges to obtain licenses to operate within the EU. They also agreed that stablecoin issuers should maintain adequate reserves.

Mairead McGuinness of the European Commission hailed the vote as a groundbreaking development in cryptocurrency regulation. In a tweet, she noted that the new rules would go into effect next year.

Stefan Berger, the legislator who spearheaded the negotiations, said these regulations put the EU at the forefront of the token economy. He emphasized that the European crypto-asset industry now has regulatory clarity. This is unlike countries like the U.S., which are still debating regulation. This could help restore trust in the sector after the FTX collapse.

In a tweet, the European Securities and Markets Authority also supported the vote. They promised to announce its schedule for drafting secondary legislation under MiCA in due course. However, the EU agency warned that investing in crypto assets remains risky with limited safeguards.

European Union Markets in Crypto-Assets

The European Commission first proposed the Markets in Crypto-Assets regulation in 2020. To become law, it must be approved by the European Parliament and the EU Council, representing the bloc’s member states. The main provisions are expected to take effect approximately 12 months after publication in the EU’s official journal, likely around June.

History of the EU Markets in Crypto Assets MiCA

• 2013-2014: The European Central Bank (ECB) warns consumers about cryptocurrency risks. The ECB stated that virtual currencies are not issued or backed by any central authority and may be vulnerable to fraud, hacking, and other security threats.
• 2015-2016: The European Commission (EC) launched the Digital Single Market (DSM) strategy, which included proposals for regulating virtual currencies. The EC proposed to bring virtual currency exchanges and wallet providers under the scope of the EU’s anti-money laundering (AML) rules.
• 2017: The EU Parliament and Council agreed on the 5th Anti-Money Laundering Directive (AMLD5), which included provisions for regulating virtual currencies. Under AMLD5, virtual currency exchanges and wallet providers must register with national authorities and comply with AML rules.
• 2018: The EU Parliament and Council agreed on the 5th Anti-Money Laundering Directive (AMLD5), which included provisions for regulating virtual currencies. Under AMLD5, virtual currency exchanges and wallet providers must register with national authorities and comply with AML rules.
• 2019: The European Securities and Markets Authority (ESMA) published guidelines on initial coin offerings (ICOs) and crypto assets. The guidelines clarified the application of EU securities laws to ICOs and guided how national regulators should regulate crypto assets.
• 2020: The EU Commission proposed a new regulatory framework for crypto assets, the Markets in Crypto-assets (MiCA) Regulation. MiCA aims to provide a harmonized framework for regulating crypto assets in the EU and would require issuers of certain crypto assets to register with national authorities.
• 2021: The EU Parliament adopted the Regulation on Markets in Crypto-assets (MiCA), which will come into effect in 2022. MiCA aims to provide a clear regulatory framework for the issuance, trading, and custody of crypto assets in the EU and to ensure that these activities are subject to appropriate supervision and consumer protection.

European Union Markets in Crypto-Assets details

The European Union legislators approved two sets of new crypto rules to regulate the growing digital asset industry:

Rules for service providers

This comprehensive licensing framework provides a harmonized set of rules for crypto-asset service providers and issuers within the EU. Critical provisions of MiCA include:

1. Licensing Requirements: Crypto wallet providers and exchanges must obtain a license to operate across the EU, ensuring they comply with legal and operational standards.
2. Stablecoin Issuers: Issuers of stablecoins, which are tied to the value of other assets, must maintain sufficient reserves to guarantee their stability and reduce potential risks.
3. Transparency and Disclosure: The regulation introduces transparency requirements, obligating issuers to provide detailed information about themselves, the crypto-asset they issue, the technology used, and associated risks to help investors make informed decisions.
4. Consumer Protection Measures: MiCA mandates implementing consumer protection measures, such as complaint handling and dispute resolution mechanisms, to address potential issues arising from using crypto-assets.
5. AML and CFT Compliance: Crypto-asset service providers are required to adhere to anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations, ensuring a more secure and compliant ecosystem.
6. Supervision and Enforcement: National competent authorities will supervise and enforce the MiCA rules, while the European Securities and Markets Authority (ESMA) will coordinate among these authorities.

Rules for transfer of funds

This separate legislation aims to combat money laundering and terrorist financing by imposing strict requirements on crypto operators, including:

1. Know Your Customer (KYC) Procedures. Crypto operators must implement KYC procedures to identify and verify the identity of their customers before providing services.
2. Transaction Monitoring. Operators must monitor transactions continuously and report suspicious activities to relevant authorities.
3. Record-Keeping. Crypto operators must maintain accurate and up-to-date records of customer information and transactions for a specified period to assist authorities in their investigations if needed.

The main provisions of these new rules are expected to come into effect approximately 12 months after their publication in the EU’s official journal, likely around June. These regulations protect consumers, safeguard financial stability and market integrity, and offer regulatory clarity for the European crypto-asset industry.

Crypto regulation is coming to both sides of the pond

The timing of these regulations is important as the US debated a bill on stablecoin regulation just the day before. The EU is the world’s third-largest economy after the US and China. Regulation has been progressing across the world. With the biggest players in the world are making concrete moves towards comprehensive regulation.

The US operates on a rules-based system, where the test of the world works on a principles-based system. You can see this in practice based on the US proposing 1:1 Fiat collateral for stablecoins. Meanwhile, the EU proposes “suitable reserves” for stablecoins. Nonetheless, the tide of regulation seems to focus on the same issues. Meanwhile, the African continent is nowhere near comprehensive regulation. Only South Africa has comprehensive regulation, while Kenya and Namibia have shown some progress towards regulation. If anything is clear, it’s that it’s time for regulation. However, the progress made by the EU and the US debates may catalyze other countries to follow suit shortly.

It’s regulation time

The era of unregulated cryptocurrencies is ending as the world increasingly embraces digital assets. Consequently, the industry’s stakeholders must adapt to this new regulatory landscape. Collaboration with authorities will ensure a safe, transparent, and compliant ecosystem for all participants. This will foster trust, stability, and growth within the burgeoning crypto economy.