EU crypto regulation: Stakeholders cross fingers for consistency

With 27 member states, proposed legislation aims to streamline the continent’s rules and regulations

Hand holding a bitcoin, EU flag in background – Photo: Shutterstock                                 
EU-based bitcoin miners are safe… for now – Photo: Shutterstock
                                

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The cryptocurrency regulation debate is heating up on both sides of the Atlantic. While US regulators are butting heads over stablecoins and taxes, the EU continues to grapple with sanctions, mining rights and just how to bring its 27 member states under the same umbrella.

Will 2022 be the defining year for crypto regulation in the EU? What are the major ongoing debates surrounding EU crypto regulation? And what might be in store next? Let’s find out.

Proof-of-work mining: To ban or not to ban?

In March 2022, the EU parliament shot down an amendment to the Markets in Crypto-assets (MiCA) proposal seeking to ban the proof-of-work (PoW) mining method. Used by major cryptocurrencies including bitcoin and ether (although the latter will adopt the cleaner proof-of-stake method this year), PoW continues to be a source of contention among regulators and the wider community for its power-intensive nature.

Graph illustrating bitcoin electricity consumption compared with other nations
Bitcoin mining consumes almost as much electricity as Egypt – Source: Cambridge Bitcoin Electricity Index

The failed amendment came after China’s crackdown on crypto mining in 2021. But while EU-based miners can sleep easy for now, the issue is likely to resurface in the years ahead.

“Crypto-proponents remain wary,” according to an analysis by Big Four consulting firm Deloitte. While an outright mining ban seems unlikely for now, the draft MiCA text stipulates that crypto-assets should be subject to minimum environmental standards under the remit of EU taxonomy regulation, added Deloitte.

Without concrete guidelines, energy-sapping mining practices could once again face legislative challenges in the years ahead. Furthermore, news coming out of New York state could serve as another warning sign that the mining issue is far from dead and buried.

The Democrat and Independent-sponsored Bill A7389C seeks to establish a two-year moratorium on PoW mining pending a “full generic environmental impact statement review”. Having recently passed the State Assembly, an approval from Governor Kathy Hochul could influence legislation not just across the US, but in Europe too.

Such is the opinion of Javed Khattak, chief finance officer of blockchain network cheqd. The EU’s rejection “does not mean an easy road ahead for crypto advocates,” according to Khattak, adding: “There will be some regulation coming around the environmental impact of crypto assets, possibly in the form of a tax… This makes sense from their perspective as there’s a benefit through an income stream for the government as well.”

AML and sanctions: Exchanges in the spotlight

Russia’s military invasion of Ukraine had (and continues to have) a significant impact on the conversation surrounding EU cryptocurrency regulation. In regards to sanctions, “that’s one place where authorities and regulators are really starting to crack down,” stated Bloomberg’s Emily Nicolle at the recent CryptoCompare Digital Asset Summit 2022, Europe’s flagship institutional summit for digital assets.

In line with this crackdown, the EU clarified that the scope of sanctions on Russia and Belarus does indeed include crypto assets in all their forms. However, the centralised exchanges (CEXs) that facilitate the vast majority of crypto transactions do not always have the tightest relationship with compliance.

The world’s largest CEX Binance only implemented verification requirements for all users in August 2021. Prior to that, the exchange imposed withdrawal limits on unverified users. Unverified KuCoin users can still withdraw up to one bitcoin every 24 hours, while photo identification is not required for basic verification.

With the above-mentioned sanctions bringing know your cumstomer (KYC) and anti-money laundering (AML) laws into the spotlight, enhanced scrutiny on the exchanges’ compliance practices feels like an inevitability.

But some exchanges are more bullish on regulation than others, particularly those with a substantial European presence. The likes of Coinbase and eToro impose KYC requirements on each and every user. Speaking at the CryptoCompare summit in March 2022, Julian Sawyer, chief executive officer of Luxembourg-registered crypto exchange Bitstamp, said: “It’s a very easy headline to say crypto is a place where you can avoid sanctions, but I don’t believe that is true. If anybody is a sanctioned individual, they will not be on our exchange, full stop.”

DeFi: Regulatory outliers?

While holding only a fraction of the multi-trillion-dollar total global cryptocurrency market, the prominence of decentralised finance (DeFi) is steadily increasing, with a total value locked (TVL) of more than $194bn as of 6 May.

Graph of DeFi TVL and Curve’s dominance – Source: defillama.com
Curve dominates 9.52% of the DeFi market – Source: defillama.com

As an alternative to their centralised counterparts, decentralised exchanges (DEXs) have no intermediary, instead relying on user-generated liquidity pools to facilitate trades. As a trustless financial system, questions remain over how such entities could be brought into the regulatory fold.

The MiCA framework does not address these issues. Writing in TechCrunch, Benjamin Whitby, who oversees regulatory affairs at cross-chain protocol Qredo, suggested that an extraterritorial approach in similar vein to General Data Protection Regulation (GDPR) is a possibility, “though it remains unclear how authorities can enforce against organisations outside the EU”.

And Sawyer said: “DeFi is out of the remit of a lot of the regulators, [but] there will be a point where the regulators understand, want to control and want to manage AML and KYC regulations, and I think that’s going to be really interesting how the DeFi world fits into traditional financial services.”

DeFi could be next on the US regulators’ hit list. But will the EU follow suit?

EU crypto regulation: Deep dive into MiCA

Stablecoins might not be as front and centre of EU cryptocurrency regulation like in US, but MiCA goes to lengths to stress the importance of robust checks and balances of this $185bn market.

The proposal suggests a “bespoke legislative regime aimed at addressing the risks posed by stablecoins,” combined with “regulating stablecoins under the Electronic Money Directive”. A third suggestion of restricting the issuance and provision of stablecoins was largely rejected in the proposal.

Another point of contention in the regulation debate concerns the balance between innovation and consumer protection. While a large proportion of the legislation emphasises the former, MiCA also states: “​​One of the strategy’s identified priority areas is ensuring that the EU financial services regulatory framework is innovation-friendly and does not pose obstacles to the application of new technologies.”

Much of the proposed legislation emphasises a “dedicated and harmonised framework” at the EU level, which could be music to the ears of the many stakeholders hoping to broaden their European operations.

Consistency is key

A streamlined approach to regulation is important. That's the clear message among the crypto community (at least, for those with a pro-regulatory mindset). “We would like to have consistency in regulation,” stated Sawyer. “If you look at the vast regime within the European Union, it is different in every country.”

In Sawyer’s view, inconsistent regulation could push consumers to “bad actors” offshore, since regulated exchanges are less inclined to set up shop in smaller jurisdictions given the complexities involved.

If the regulatory quagmire in the US is anything to go by, an endless list of commissions, regulators and other government bodies continually fighting for jurisdictional sovereignty (for more on this, read our report on US crypto regulation) only serves to stall progress.

“Clarity means that we can plan, clarity means that we can communicate to customers about the protection of their assets. And it takes away some of that noise, that clickbait of ‘bitcoin is bad’,” stated Sawyer, adding: “Let’s have that grown up conversation and help the regulators and help the markets to get where we all want to go as an industry.”

Will they listen? For the EU’s part, MiCA does state that “proposed regulation will replace existing national frameworks applicable to crypto-assets not covered by existing EU financial services legislation”.

With MiCA aiming for a 2024 implementation coupled with increasing scrutiny on the centralised exchanges, we could be on the brink of a major shift in cryptocurrency regulation across the EU. Be sure to stay tuned to Currency.com for the latest EU crypto regulation news.

FAQs

Yes, although EU regulation on cryptocurrency varies between member states. The proposed Markets in Crypto-asset (MiCA) framework seeks to harmonise these disparate laws.

Currently, Member states are individually responsible for crypto regulation and EU crypto tax laws. It is recommended to consult your government website for specifics. The proposed MiCA framework seeks to harmonise regulation across member states.

Yes, government bodies often work with forensic blockchain analysts to trace and blacklist illicit cryptocurrency transactions. While “tumblers” and privacy coins, such as Monero, can obfuscate transactions, they have not proved to be foolproof. 

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