How the EU crypto framework will affect European Investors

On one end, the US Securities and Exchange Commission (SEC) is under criticism from the crypto community for adopting a regulatory agenda that is perceived as restricting and unclear. On the other hand, the European Union has taken the lead in regulation by providing thorough guidelines outlining how the region’s cryptocurrency business would operate. Here, we explore more about these guidelines framework and how it will impact European investors.

On April 20, the European Parliament approved a comprehensive crypto framework to govern the cryptocurrency sector. The framework establishes guidelines for crypto platforms, token issuers, and traders in European countries. Among the many things stated in the framework are details about transaction transparency, fund disclosure, and industry supervision.

More specifically, the EU Parliament lawmakers approved the Markets in Crypto-Assets (MiCA) Act and the Transfers of Funds regulation, details of which will be discussed later in the article.

The crypto framework is important for two reasons. One is that it is a big step forward in the realm of crypto regulation, something which has been lacking in recent years. Secondly, Europe is a major player in the crypto industry and a detailed framework would foster crypto adoption over the long run.

Central, Northern, and Western Europe are one of the world’s largest crypto economies, having received $1.3 trillion worth of cryptocurrencies from institutions and users between July 2021 and June 2022, according to research firm Chainalysis.

Following that, the European Council will evaluate the measure and vote on its approval to implement MiCA. However, assuming the measure is passed, the policies described in it will take some time to implement. On the bright side, European cryptocurrency investors and businesses will have more time to adjust to the changes.

Under the new crypto licensing regime MiCA, the legislation intends to protect customers from market exposure. This means that crypto operators would be liable if they lose investors’ crypto assets due to mismanagement or any other mishap. This rule seems to be a hard lesson learned from the FTX collapse.

Furthermore, crypto platforms will be required to inform their clients and users about the risks involved with crypto operations. Additionally, the sales of new tokens will also fall under the MiCA regulation. Stefan Berger, who led the bill’s creation, said that before new coins are approved, the issuer must ensure that their business model will not endanger the nation’s currency stability. The bill also mentions that stablecoin issuers like Tether (USDT) and Circle (USDC) will need to maintain enough reserves to back up customer funds in case of mass withdrawals.

Meanwhile, the “Transfer of Funds” section requests that crypto transactions be traced and questionable transactions be reported and prohibited. The regulation is intended to tackle money laundering and terrorist financing, two issues that have plagued the cryptocurrency market.

The guidelines outlined in the law address numerous difficulties that crypto investors face in terms of clarity, risk, and exposure. As a result, investors would feel more confident depositing their assets in an exchange’s hot wallet, knowing that any losses would be paid for. Similarly, one would feel more comfortable investing in stablecoins, which are increasingly used to mitigate market volatility.

However, the new laws also dictate that transfers between crypto exchanges and transfers of self-hosted wallets, owned by individuals, will need to be reported if the transfer amount crosses the 1,000-euro mark. This means that individuals would no longer be privy to privacy when making larger transactions.

Previously, the proposed MiCA rules draft contained an outright ban on proof-of-work crypto mining. In the new rules, however, MiCA has settled for asking crypto firms to report the environmental impact of their activities rather than banning mining altogether. This means that small mining pools or even individuals may not have to completely give up proof-of-work mining, provided they are consistent with reports requested under MiCA.

Crypto firms, such as Binance, Kraken, and Coinbase, which have faced the wrath of the US SEC recently, have responded positively to the EU framework. The Vice President of International Policy at Coinbase said that the EU’s adoption of MiCA is a pivotal moment for the crypto ecosystem and the work of EU lawmakers should be seen as exemplary.

Richard Teng, Regional Head of Europe and MENA at Binance, said that the regulations will bring clarity to one of the largest crypto markets in the world, while also making the EU an attractive hub for Web3 initiatives.

The European Commission’s Mairead McGuinness referred to the EU crypto framework as the world’s first comprehensive digital asset framework. The parliament is preparing to make MiCA a law in 2024, with a notable jurisdiction to provide clear regulation on the burgeoning innovative crypto industry. Going forward, it will be interesting to see how other nations respond to the EU bill and whether they adopt something similar to regulate their respective crypto markets.