The EU is at the forefront of regulating crypto.
N ew rules in the European Union require cryptocurrency businesses to operate with a license and mandate that stablecoin issuers hold reserves like those banks have, part of a landmark effort by the bloc to regulate a chaotic sector.
Following almost two years of negotiations, the European Council and Parliament on Thursday agreed on the Markets in Crypto-Assets (MiCA) proposal to bring digital asset businesses under a regulatory framework for the first time. The provisional agreement is subject to final approval before being formally adopted.
“Recent developments on this quickly evolving sector have confirmed the urgent need for an EU-wide regulation,” said Bruno Le Maire, the French minister for the economy, finance, and industrial and digital sovereignty, in a statement. “This landmark regulation will put an end to the crypto wild west and confirms the EU’s role as a standard-setter for digital topics.”
Under the new MiCA rules, crypto service providers will be liable in case they lose investors’ assets, and will be subject to European market-abuse regulations, including those on market manipulation and insider trading.
The rules don’t cover some hot-button issues in the crypto space, including proof-of-work, which lawmakers initially wanted to address from an environmental perspective, given the vast amounts of energy mining some coins involves. Nonfungible tokens and decentralized finance projects also weren’t covered.
But MiCA does detail new rules for stablecoins—crypto tokens that are designed to be pegged to another asset, typically the dollar or euro. Stablecoins stand at the heart of the crypto economy, providing a steady store of value in a volatile world and acting as the bedrock of all liquidity.
That part of the industry has come under intense scrutiny since May, when the meltdown of a stablecoin called TerraUSD exacerbated a selloff that wiped away $400 billion in market capitalization. A brief move in the stablecoin Tether away from its peg to the U.S. dollar—and questions about the backing for the token—have similarly shaken investors’ confidence.
MiCA will subject issuers of large stablecoins to strict rules, including maintaining reserves to cover all claims and providing immediate redemption rights to holders. There will also be a limit on €200 million ($208 million) in transactions each day as part of restrictions if stablecoins are used widely as a means of payment.
“The outcome reflects a sensible coalition approach and provides clarity in critical areas. It also, for the most part, avoids stifling innovation that will benefit some 450 million people across 27 countries,” Sheila Warren, CEO of the Crypto Council for Innovation, said in a statement.
MiCA came the day after the EU agreed on other rules that will affect crypto businesses, covering anti-money-laundering regulations and the tracing of digital assets. Under another set of regulations on which lawmakers reached a provisional agreement on Wednesday, crypto asset businesses are obligated to collect and make accessible certain information about parties on either side of a transaction.
European lawmakers have also detailed that there will be specific requirements for crypto transfers between providers like exchanges and un-hosted or self-hosted wallets like those via MetaMask.
“The finalized version of the [Transfer of Funds money laundering rules] and MiCA can still be viewed as a win for the crypto industry and for self-sovereignty, despite some setbacks,” Alex Thorn, the head of research at digital asset group Galaxy Digital (ticker: GLXY.Canada), wrote in a note. “Europe is taking the global lead when it comes to regulating crypto, which will certainly influence how other economies shape their regulatory frameworks to oversee the industry.”
Progress in the EU puts Europe at the forefront of regulating the sprawling digital asset economy, and is likely to set a standard for other international rules.
In the U.S., President Joe Biden has issued an executive order calling for the regulation of crypto. In Congress, Senators Cynthia Lummis (R., Wyo.) and Kirsten Gillibrand (D., N.Y.) have proposed sweeping rules for digital assets with implications for tax, regulatory oversight, stablecoins, crypto mining, and more.