The European Union is all set to take a lead in regulating cryptocurrencies and crypto-assets. Achieving regulatory leadership isn’t something new for the EU. A few years back, the EU did it successfully in a different but related field of data privacy. GDPR became the icon of European values with several non-EU giants having to make significant modifications in their operations to avoid hefty fines. In a similar manner, the EU regulators are contemplating reaching a cohesive and far-reaching regulatory approach towards the established cryptocurrency ecosystem. This strategy plans to make use of anti-money laundering directives, continuously evolving definitions for crypto-assets, creating sandboxes for testing, and even improvising with the idea of a European Central Bank-backed “Digital Euro”. Here, we will discuss some of the important points related to the future of crypto regulation in the EU.
Markets in Crypto Assets (MiCA)
The EU has been contemplating regulating crypto assets since the year 2018. Eventually, in September last year, the European Commission came up with MiCA regulations under the ambit of Digital Finance Package. This regulatory framework also deals with crypto assets service providers (CASPs).
It will be enforceable by the year 2024 and will lead to the end of national crypto policies in favor of a centralized roadmap. Generally speaking, it will allow CASPs to operate with greater ease throughout the EU but with far tighter controls.
Crypto Assets consist of Asset-Referenced and E-money tokens. The first category of the token is pegged to one or more fiat currencies/commodities while the second one is pegged to a single fiat currency. Stablecoins, like the Libra launched by Facebook, also belong to this asset class.
Future Of Crypto Regulations: DeFi
Decentralized Finance or DeFi appears to be the most pressing issue for global financial regulators these days. This is what led to the fast-track development of MiCA regulations. Its decentralized and non-custodial nature obscures it from conventional mechanisms.
One such decentralized crypto exchange is UniSwap that has been consistently taking market share from well-known centralized exchanges like Bittrex or Binance. The majority of these applications run on the Ethereum blockchain.
Overall, DeFi economy has been growing at astounding rates for the last two years. Crypto experts believe that regulation of DeFi will be the most crucial factor in deciding the future of crypto regulation in the EU and globally. Some even argue that regulating this highly-decentralized ecosystem is next to impossible and countries should proceed towards an outright ban. Others contend for embedding regulation right into the source code of blockchain applications which will definitely require cooperation from the blockchain software developers. However, this may leave extraordinary powers in the hands of developers who may change the code to evade regulatory oversight.
The EU plans to utilize MiCA regulations in DeFi’s context as well. Requirements like issuance of whitepapers and setting up an EU legal entity seem like the starting point in this regard.
Anti-Money Laundering drive is taking place globally. It involves the deployment of the newest technology for compliance checks and KYC. The European Union has been issuing Anti-Money Laundering Directives since the early nineties. The latest in place is the 5AMLD which introduced several compliance requirements for businesses dealing in cryptocurrencies.
6AMLD will further strengthen these regulations as it becomes effective by the month of June. 6AMLD puts an unprecedented amount of focus on ‘Cyber Crime’ and ‘Environmental Crime’ with stricter punishments for persons and firms doing or enabling such criminal activities. The EU will continue to regulate cryptocurrencies and crypt-assets in the future using these directives.
Another idea related to the future of digital currencies in the EU is that of an ECB-backed ‘Digital Euro’. Following the principles of conventional market economics, regional policymakers think that introducing a controlled digital currency will create an outflanking competition for the allegedly-unregulated cryptocurrencies.
Recently, ECB’s President Christina Lagarde advocated for a global layer of regulation for Bitcoin, as it had some ‘funny business’. Moreover, she stated Digital Euro as a reality emerging in the next five years. Digital Euro will surely increase the speed of money transfer at lesser costs, bringing greater financial stability. However, it won’t replace banknotes.