A new ‘crypto-sheriff’ in town: Can the EU end the ‘Wild West’ of cryptocurrency?

By Matthew Redley

The founding principles of cryptocurrency are that it is both decentralised and unregulated. These principles are held by true crypto purists as the qualities which make it preferential over traditional finance, given it is removed from centralised regulatory authority like banks and governments.

However, last Thursday evening, EU member states and the European parliament agreed on rules which will see the greatest step towards regulation of the sector so far, aiming to protect consumers, whilst allowing the market to flourish. “We will have a new crypto-sheriff in the EU,” said Spanish MEP Ernest Urtasun boldly, declaring that the EU was “moving from the wild west of unregulated and risky digital assets to a safer crypto sphere.”

The rules, titled Markets in Crypto Assets (MiCA), aim to provide greater protection to consumers, attempting to throttle illicit activity facilitated by the sector, whilst offering greater legitimacy to cryptocurrency.

The EU’s introduction of these rules follows a brutal market crash in 2022, which has seen 70% of the size of the market wiped out since November 2021, underlining the need for a framework of rules to protect consumers and businesses invested in the rapidly developing sector.

These new rules include establishing traceability of crypto assets being traded within the EU, and between the EU and other jurisdictions. Cryptocurrencies enable anonymised payment between two parties, meaning that neither the sender nor the receiver leave a digital trace that can be linked to a person’s real identity, and this feature has been valuable to those who use cryptocurrency for criminal activity online, such as money laundering processes, the online trade of illicit goods and services, and fraud.

With new traceability rules, Crypto-asset service providers (CASPs), which might manage, sell, or exchange crypto assets on behalf of another, will be allowed to effectively ‘passport’ its services throughout the EU, and will be subject to supervision. The agreement extends the so-called “travel rule” already existing in traditional finance, meaning that information on the source of the asset and its beneficiary travels with the transaction and is stored on both sides of the transfer. CASPs, such as third-party platforms that provide hosted wallets like Coinbase, Crypto.com or Binance, will be obliged to provide this information to the authorities if an investigation is conducted into money laundering and terrorist financing.

The law will also see the cryptocurrency sector more focused on its environmental impact, stipulating that crypto asset providers should, in future, disclose the energy consumption and environmental impact of assets. As environmental concerns become an even greater focus for consumers, cryptocurrency is likely to be under renewed scrutiny for its impact on emissions. In 2019, a study found that Bitcoin production is estimated to generate between 22 and 22.9 million metric tons of carbon dioxide emissions a year, or between the levels produced by Jordan and Sri Lanka.

The new law also focuses on setting conditions for assets like ‘stablecoins’, cryptocurrencies that attempt to peg their market value to some external reference. The agreement sets out strict requirements on establishment, authorisation, and reserve management of stablecoins. Issuers of stablecoins will have to hold a reserve of assets, so that in any sudden run by consumers to sell off their stablecoins, they would receive the equivalent in the underlying assets.

Crypto industry figures have tentatively welcomed the EU’s MiCA laws, given it will increase the sector’s credibility and legitimacy, promote adoption by conventional banks, and offer crypto currencies a single licence to operate throughout the EU, meaning that crypto providers don’t have to navigate multiple national legal systems.

As cryptocurrency becomes more popular, the greater the risk of something going wrong and causing a world shock, furthering the need for similar policy to be introduced in the US and the UK. For now, the EU’s regulatory work represents a positive step in guiding the sector.