What You Need To Know About EU’s Latest Proposal for Cryptocurrency Regulations

The “Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive” published on November 19, 2021 has an overwhelming 405 pages in total. If you’re not a fan of novel-size bodies of text, don’t worry, this article will cover the most important points in the proposal.

How Significant Is This Proposal?

In short, quite significant. The proposal covers regulations regarding both issuers of crypto assets (developers and companies behind coins or tokens) and service providers (exchanges and custodians). More than that, the Council of the European Union has started negotiations with the European Parliament, which means there is a high chance the proposed regulations will become EU law with only minor adjustments.

This news is not only significant for Europe. Being the first established, complete set of regulations, it will more than likely set the scene for the rest of the world to follow. And luckily, the EU’s approach to cryptocurrencies seems to be beneficial for investors and the industry as a whole.

The EU claimed to be interested in “developing and promoting the uptake of transformative technologies in the financial sector.” They also said that the regulations aim to “support innovation and fair competition, while ensuring a high level of protection of retail holders and market integrity in crypto-asset markets, enable crypto-asset service providers to scale up their business on a cross-border basis, and facilitate their access to banking services to run their activities smoothly.”

Regulations for Issuers/Offerors of Crypto Assets

Crypto Assets That Are Non-Fungible (NFTs): No Regulation

NFTs including digital art and collectibles will be unaffected by the rules in the proposal. It doesn’t matter whether they are traded in marketplaces and have high speculative value.

Utility Tokens: No Regulation

Any crypto asset that is only meant to provide access to a good or service by the issuer of that asset will not be regulated, so long as said good/service is in operation.

Crypto Assets That Are Offered For Free: No Regulation

A crypto asset falls into this category when the receiver doesn’t give money, fees, personal data or commissions to the offerers in exchange for those crypto assets. These assets are not bound to the rules described in the proposal.

In addition, crypto assets that are “automatically created as a reward for the maintenance of the DLT or the validation of transactions in the context of a consensus mechanism” will also be unregulated.

E-Money (Stablecoins): Very Strict Regulations

The EU defines ‘electric money token’ as crypto assets that references the value of an official fiat currency of a country in order to maintain a stable value. Heavy regulations will be placed on these tokens as only recognized credit institutions and ‘electronic money institutions’ will be allowed to issue them.

Stablecoins also have to follow strict rules that seem to eliminate the possibility of earning interest from them for EU citizens. But it will take a few years for all this to be voted into laws so investors and exchanges should have time to adjust.

Asset-Referenced Tokens (Another Type of Stablecoins): Very Strict Regulations

“Asset-Referenced Tokens’ refer to crypto assets that are not electronic money tokens but attempts to maintain a stable value by referencing any other value (Libra by Facebook/Meta for example). Only credit institutions and entities already been granted permission by an EU Member State can issue asset-referenced stablecoins.

Other Crypto Assets: Some Regulations

This group is for all crypto assets which don’t belong in any previously-mentioned groups, such as payment coins that don’t promise a stable value or tokens that cannot be seen as utility tokens. The proposal establishes multiple rules regarding the content of whitepapers and marketing. 

The European Securities and Markets Authority (ESMA) will be likely to introduce templates and standards for white papers. These regulations will be very good for eliminating scams with insufficient whitepapers and those putting misleading information in their advertisements.

Regulations for Exchanges and Custodians

Centralized Exchanges/Custodians: Strict Regulations

The proposal puts forwards rather strict rules regarding launching and operating an exchange/custodian. They would have to be officially authorized in an EU Member States, under the obligation to act in the best interest of clients (protecting the funds of clients, holding crypto assets of clients in separate accounts belonging to the exchange, keeping handling procedures transparent,…) 

Exchanges/custodians are also under obligation for capital requirements, safeguards and insurance policies. In addition, they are required to ensure a trading system that has the capacity to handle peak order volume.

Some people may wonder how would these rules apply to privacy coins such as Monero, and the answer is that these coins have a high chance of not being allowed in trading platforms. The exception is if “the holders of the crypto-assets and their transaction history can be identified by the crypto-asset service providers that are authorised for the operation of a trading platform for crypto-assets”.

Decentralized Exchanges and DeFi: No Regulation

To be exact, only fully decentralized exchanges and DeFi protocols will be exempt from regulations. Partially decentralized exchanges will still be under some of the rules in the proposal. This is pretty vague but the document does state that the EU will decide whether to regulate this space in the next few years.

Self-Custody Software Wallets/Hardware Wallets: No Regulation

Self-explanatory: absolutely no rule will be applied to anonymous wallets that fall into these categories.

Conclusion: EU Wants To Dominate The Cryptocurrency Industry

Regulation has always been a subject of much debate among the crypto industry, but the proposal shows that the EU is taking a rather open-minded approach to cryptocurrencies. On paper, the rules and regulations look like they will put an end to shady crypto projects with no utility while also allowing decent space for technological developments. And ultimately this will be beneficial for EU investors the most.

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