Cryptocurrencies: The European Union Investigates Market Regulation

In full expansion, crypto assets are gradually being regulated at the European level. Through several draft regulations, the European Union (EU) aims to better protect consumers, reduce the carbon footprint generated by these digital assets and guarantee the same traceability as traditional money transfers. For industry players, this new European legislation threatens to jeopardize the sustainability of the cryptocurrency market.

The EU adopts new rules to regulate crypto assets

The draft European regulation on “crypto-asset markets”, known as “MiCA”[1], is the first step in the regulation of cryptocurrencies within the EU. Voted in first reading on 14 March 2022 by the Committee on Economic and Monetary Affairs of the European Parliament, the proposal for a Regulation of the European Parliament and of the Council on markets in crypto-assets and amending Directive (EU) 2019/1937 , “harmonized and specific framework” in the EU.

The project is part of a legislative package related to digital finance presented by the European Commission on September 24, 2020. It aims to stimulate innovation while ensuring consumer protection, market integrity and financial stability. Notably, it creates the European Digital Asset Service Provider (PSAN) status[2].

On 31 March 2022, MEPs from the Committee on Economic and Monetary Affairs and Civil Liberties took a second step by adopting at first reading the draft law aimed at strengthening EU rules against money laundering and terrorist financing[3]. This legislation, resulting from the AML/CFT legislative package (combating money laundering and terrorist financing) presented on 20 July 2021, aims to ensure the traceability of crypto-assets equivalent to those of the usual money transfers and to block suspicious transactions.[4].

According to the project, “all transfers of crypto-assets”, whether transactions are made from hosted (platforms) or non-hosted wallets (owned by a private user), without distinction of amount, “must be accompanied by information about sources and recipients.” Only person-to-person transfers made without a service provider or between service providers acting on their own account are exempt.[5].

A regulation that worries players in the sector

Several players in the crypto asset market are warning of the risks associated with the final approval of these texts. Asked by Ouest France, Claire Balva, Blockchain and Cryptos Director at KPMG France, believes that the measure requiring verification of the identity of people transacting on non-hosted wallets “goes against the crypto philosophy that [est] to ensure privacy on the Internet. According to her, this traceability requirement “isolates the European market and makes it lose its competitiveness compared to other trading platforms”.[6].

Likewise, the Association for the Development of Digital Assets, in a press release dated March 31, 2022, believes that “such a measure poses many difficulties, especially in its practical implementation” and that it “will slow down the development of the crypto- assets could undermine sector in Europe »[7].

The MiCA project had also raised concerns. In the original version, Article 61 of the text provided for subject crypto-assets to minimum standards for environmental sustainability. This measure would have had the effect of prohibiting the exploitation of certain cryptocurrencies using a proof of work validation system, such as Bitcoin or Ethereum, in Europe.

Although this provision has been rejected, professionals in the crypto asset sector remain alert to regulatory developments. Indeed, the Committee on Economic and Monetary Affairs must submit a proposal by January 1, 2025, which would include “any crypto-asset mining activity that contributes substantially to climate change” in the EU’s sustainable activity classification system.[8].

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