Understanding the new proposed EU framework for cryptocurrency regulation

Cosgrove Gaynard Solicitors

As part of the Digital Finance Package released regarding cryptocurrencies in Europe ,it is proposed to regulate crypto assets and markets in crypto assets (MiCA) and to provide definitions of crypto assets and token subcategories. It will also set out rules for digital asset custody and capital requirements.

Cryptocurrency in Europe - What is proposed in terms of regulation

Digital transformation has become the buzz word across the corporate world. And the world of finance is no exception. Digitalisation and tokenisation have brought increased opportunities for trade, but also many risks.

On 24 September 2020, the European Union took a major step in an effort to regulate crypto assets by unveiling a comprehensive framework it hopes will come into force in 2024.

As part of the Digital Finance Package released regarding cryptocurrencies in Europe
(https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1684 )

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It is proposed to regulate crypto assets and markets in crypto assets (MiCA)and to provide definitions of crypto assets and token subcategories. It will also set out rules for digital asset custody and capital requirements.

If passed into law, the regulations will turn the European Union into the largest regulated market for cryptocurrencies in the world. These would be applicable across all 27 EU member states, with no requirement for ratification by individual members.

The background

In 2018, the European Commission asked the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to assess the existing financial regulations' capabilities in the context of rapidly evolving crypto assets. The resulting "https://ec.europa.eu/info/sites/info/files/180308-action-plan-fintech_en.pdf" FinTech Action Plan recognised that crypto-assets mostly fall outside existing EU legislation aimed at protecting consumers and investors.

The Digital Finance Package builds on this initiative intending to promote the benefits of digital technologies for trade, including blockchain, artificial intelligence and Digital Ledger Technology (DLT), while controlling the risks.

Valdis Dombrovskis, the EU Trade Commissioner, said: "The future of finance is digital... Technology has much more to offer consumers and businesses and we should embrace the digital transformation proactively, while mitigating any potential risks."

Therefore, the EU aims to promote responsible innovation and user-friendliness in digital technologies for both consumers and investors, while limiting the risk for fraud and crime.

The Digital Finance Package includes a Retail Payments Strategy for a robust payments infrastructure, a legal framework for promoting opportunities while limiting risk, and a legal framework for digital operational resilience against cyber attacks.

The framework

The proposed legislation aims to mitigate volatility in the cryptocurrency markets. It also aims to reduce fragmentation across the EU whereby approval in one member state is reflected across all member states. It will also mandate a physical presence in the EU.

It also aims to provide a regulatory framework for asset-backed cryptocurrencies such as stablecoins, in the wake of Facebook's announcement of Libra.

Conclusion

The EU's MiCA proposal aims to make provisions for crypto assets that currently fall outside existing financial services legislation aimed at protecting consumers and investors.

It aims to promote innovation, the tokenisation of traditional financial assets and the wider use of blockchain and distributed ledger technology while preserving market stability and limiting the risk of crime. In that regard, the EU, through the European Blockchain Partnership, is proposing a sandbox testing facility bringing together regulators and experts, allowing a safe environment to test innovative solutions and identify obstacles in deploying them.