EU agrees rules to rein in the ‘Wild West’ of crypto assets

After hours of negotiations, the European Commission, EU lawmakers and member states have reached an agreement on a groundbreaking set of rules to guard against abuse and manipulation in the cryptocurrency market.

The new regulations, known as the Markets in Crypto-assets (MiCA) law, will require cryptocurrency companies to obtain a licence and meet struct capital and consumer protection rules in order to be allowed to operate in the EU. Companies issuing or trading crypto assets such as stablecoins will be forced to provide customers with detailed information on the risks, costs and charges that they face by obtaining these assets.

Under the new rules, stablecoins like Tether and Circle’s USDC will be required to maintain ample reserves to meet redemption requests in the event of mass withdrawals. Moreover, the European Securities and Markets Authority (ESMA) will also receive powers to step in to ban or restrict crypto-exchange platforms should they be perceived to not be adequately protecting investors, or if they are considered suspect of threatening market integrity or financial stability.

The announcement came a day after the three main institutions finalised measures aimed at stamping out money laundering with these types of digital assets.

“Today, we put order in the Wild West of crypto assets and set clear rules for a harmonised market,” said Stefan Berger, the German Member of the European Parliament (MEP) who led the negotiations.

Globally, crypto assets are largely unregulated and very volatile. In fact, the EU agreement comes at a difficult time for these types of currencies pressured by the collapse of the terraUSD stablecoin, with Bitcoin facing its worst quarter in more than a decade and major US crypto lender Celsius Network freezing withdrawals and transfers.

Overall, the total value of the market has fallen from $3tn (£2.5tn) last year to less than $900bn. This has had a knockout effect on economies that had heavily invested in these assets, such as El Salvador. Moreover, European authorities are also said to be concerned about the possible exploitation of crypto-assets for laundering ill-gotten gains and evasion of sanctions — particularly after Russia’s ongoing invasion of Ukraine.

“Cryptocurrencies are a clear danger,” said Shaktikanta Das, the governor of India’s Central Bank, earlier this year.

“Anything that derives value based on make-believe, without any underlying [value], is just speculation under a sophisticated name. While technology has supported the reach of the financial sector and its benefits must be fully harnessed, its potential to disrupt financial stability has to be guarded against.

Despite the ground-breaking nature of the rules, these will not affect tokens without issuers, like bitcoin, or non-fungible tokens (NFTs), although trading platforms will need to warn consumers about the risk of losses associated with trading digital tokens. However, the EU Commission has been tasked with determining whether NFTs require their own regime within 18 months.

In addition to addressing the market volatility that comes with these currencies, MiCa is also focused on the environmental concerns that surround the use and trade of cryptocurrencies. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin alone uses an estimated 26.73 terawatt-hours of electricity per year, more than the annual electricity use of whole countries such as the Netherlands, Argentina, or the United Arab Emirates.

“We have agreed that crypto asset providers should in future disclose the energy consumption and environmental impact of assets,” Berger said.

However, despite these requirements, the lawmakers voted down in March a proposal to ban crypto mining, the energy-intensive process of minting new units of bitcoin and other tokens.

MiCA, which will be the first comprehensive regime for crypto assets in the world, is expected to come into force towards the end of 2023, with the hope of setting a benchmark for other regulatory regimes for crypto globally. Some stablecoin traders have welcomed the proposed legislation, with Dante Disparte, chief strategy officer at Circle - a financial investment firm powered by crypto assets -  saying that MiCA “will be to crypto what GDPR was to privacy”.

The UK and US, are two major crypto centres that might be influenced by these rules, as regulators in both countries have warned of the need for stronger safeguards in the sector.