EU Crypto Regulation Bill Passed, US Is in a Hurry

At present, global crypto regulation is drifting like duckweed in the wind. The United States, a major crypto country, is wavering between the SEC and the CFTC. Regulation in Singapore, India, Japan and South Korea is still under exploration. Although Hong Kong has continuously implemented favorable policies, its independence has been questioned.

The much-anticipated EU Markets in Crypto-Assets Regulation (MiCA) was finally finalized on May 16.

Although the plan was voted through at the plenary session of the European Parliament on April 20, it was not until May 16 that the European Council, which includes 27 countries, unanimously approved the MiCA bill, officially announcing the emergence of the world's first unified virtual asset regulatory mechanism with the most complete supervision and the clearest framework.

At present, global crypto regulation is drifting like duckweed in the wind. The United States, a major crypto country, is wavering between the SEC and the CFTC. Regulation in Singapore, India, Japan and South Korea is still under exploration. Although Hong Kong has continuously implemented favorable policies, its independence has been questioned.

In this context, the EU's move has undoubtedly set a typical example for global virtual asset regulation and is of great milestone significance. In addition, this regulation means that virtual asset compliance has opened the curtain on the world stage, and legal certainty will drive the rapid development of the encryption field.

01. Why the EU?

After the bill was passed, many people had this question. In fact, Europe is not an important player in the global encryption market. Compared with Asia and North America, Europe's market share is not high. Citing CryptoCompare's December 2022 exchange review report, European exchanges accounted for 5.4% of the monthly trading volume of global exchanges, lower than Asia (83.3%) and North America (10.6%), but it was uncharacteristically the first to launch an encryption framework.

From a historical perspective, European crypto regulation has gone through a stage from exploration to in-depth understanding:

The initial exploration began in 2015, when cryptocurrencies were in a period of rapid development, but the main market was led by China. At that time, Europe had doubts about the attributes of crypto assets. The European Court of Justice ruled that cryptocurrencies such as Bitcoin were not financial instruments but legal tender, and therefore were not subject to VAT.

This situation continued until 2018, when the European Commission issued the Fifth Anti-Money Laundering Directive (5AMLD), which brought crypto asset service providers (CASPs) within the scope of anti-money laundering and counter-terrorist financing supervision, requiring them to conduct customer due diligence, report suspicious transactions, keep transaction records, etc.

Under this directive, the countries in the EU region began to divide and rule. Leading countries such as Germany, Austria, Malta, and Lithuania have opened up exclusive virtual asset licensing systems, while some countries use anti-money laundering as the main means to monitor the encryption field. At the same time, there are also completely vacuum regulatory areas, and the supervision is divided and chaotic. Institutions need to apply for compliance licenses or supervision from different countries. Due to the universality of EU licenses, this brings rent-seeking space for supervision. Regions such as Lithuania, which are easier to obtain licenses, have become the main focus of exchanges and other institutions.

In 2019, the European Banking Authority (EBA) issued a report stating that since crypto assets are largely not subject to EU law and pose significant consumer protection and money laundering risks, the Commission should take action. After Libra sparked controversy over private currency and legal tender, the EU continued to be cautious about cryptocurrencies and decided to take the lead in using them in the formulation of technology regulatory standards.

In September 2020, the European Commission proposed the "Crypto Asset Market Regulation Act" (MiCA) and the "Digital Operator Resilience Act" (DORA), aiming to establish a unified regulatory framework for crypto assets and crypto asset service providers, regulate the classification, definition, issuance, trading, supervision and other aspects of crypto assets, and require crypto asset service providers to comply with higher technical and operational standards.

In June 2021, the European Commission issued the Sixth Anti-Money Laundering Directive (6AMLD), which further expanded the scope of anti-money laundering and anti-terrorist financing crimes, and increased penalties for conspiracy crimes, environmental crimes, tax crimes, etc.

With the improvement of regulations and the development of the crypto market, the penetration rate of the EU market is also increasing. According to the Chainalysis 2022 Global Crypto Adoption Index, the EU ranks fourth among 154 countries and regions in the world, second only to Vietnam, India and Pakistan. Against this background, in October 2022, the European Parliament Committee passed the MiCA Act and the revised Transfer of Funds Regulation (TFR), which requires crypto asset service providers to provide the identity information of the transferor and the recipient when transferring crypto assets to facilitate tracking and monitoring of suspicious transactions.

In April 2023, the plenary session of the European Parliament will hold a final vote on the MiCA bill and formally write it into EU law.

From the perspective of the entire development process, as the understanding of the crypto field gradually deepens, the market has boosted the EU's attention to regulatory needs. After the Libra incident, the increase in regulatory needs, the absence of unified regulations, the fragmentation of existing regulations, and the maintenance of a dominant position have prompted the EU to propose MiCA. But more importantly, the current market situation of small shares and high adoption has reduced the resistance to power distribution in the construction of the European crypto regulatory mechanism, which is particularly evident in the United States. The confrontation between the two major regulatory agencies is also due to the scramble for the right to speak in the crypto industry.

02. Scope of application of MiCA

In terms of scope of application, the main crypto assets covered by MiCA are divided into four categories: traditional crypto assets, asset reference tokens, electronic currency tokens, and other crypto assets.

Crypto assets are the most intuitive category for users. They can be transmitted and stored electronically using distributed ledgers or similar technologies. They are digital representations of value or rights, such as the well-known BTC and ETH.

Asset Reference Tokens (ARTs), as the name implies, maintain a stable value by referencing the value of several fiat currencies, one or several commodities, one or several crypto assets, or a combination of the above assets. This category includes all crypto assets that do not meet the conditions of "electronic currency tokens". The key to the judgment is that ARTs maintain stability based on the value of fiat currencies. Take Digix (DGX) as an example, a typical asset reference token, which is backed by an equal amount of physical gold stored in a vault.

Electronic Money Tokens (EMTs), the difference between ARTs and EMTs lies in the configuration of the underlying assets that support the price. ARTs use non-cash assets or a basket of currencies, while EMTs mostly use a single currency, which is closer to the concept of electronic money.

Other crypto assets that are not considered ARTs or EMTs, such as “utility tokens”, are defined as providing digital access to a good or service, delivered on a DLT, and accepted only by the issuer of the token. Unlike security tokens, they are not considered a financial instrument in most countries and can only be used in compliance with anti-money laundering rules.

It should be noted here that MiCA does not directly include the NFT and DeFi fields in principle, but according to the analysis of industry insiders, NFTs issued in large series and collections will also be included in the scope.

In terms of regulatory bodies, the European Banking Authority and the European Securities and Markets Authority are the main regulatory bodies at the EU level, while the European Central Bank is responsible for stablecoin regulation. Each country designates regulatory agencies to cooperate with the EU level. It is worth noting that MiCA does not apply to the European Central Bank (ECB), national central banks, the European Investment Bank, the European Financial Stability Fund, the European Stability Mechanism and public international organizations.

Regulatory requirements vary for issuers of different assets.

For ARTs issuers, they need to obtain approval from the national competent authorities in advance. The basic requirements are that they must be a registered EU entity and have at least 2% of their own funds in total issuance, as well as the reserve management mentioned in it, such as custody, hot and cold wallets, and a complete risk management framework.

EMT issuers are limited to certified electronic money institutions (EMI) or credit institutions. Compared with ART, the requirements are relatively broad, and only the notification obligation to the competent authority is required. The basic requirements are consistent with ART, but for the protection of monetary sovereignty, this type of token is prohibited from providing interest to holders. The protection of monetary sovereignty runs through the above two categories. If the daily related transactions exceed a certain limit (1 million for ART and 200 million euros for EMT), the issuer will stop issuing the token.

The category of crypto-asset service providers is particularly complex, with different regulations applicable to different objects. For example, traditional securities brokers do not need a license to provide crypto brokerage services. However, in addition to this category, companies involved in crypto custody, trading platforms, deposit and withdrawal exchange, storage, trading orders and asset management are required to obtain a CASP (crypto-asset service provider) license from the competent authorities of EU countries.

In addition to basic requirements such as governance, asset custody, complaint handling, outsourcing, liquidation plans, and information disclosure, crypto asset service providers must maintain a minimum amount of equity capital throughout their lives: 150,000 euros for trading platforms, 125,000 euros for custodians and exchanges (brokers), and 50,000 euros for other categories.

However, for crypto providers, this capital requirement is just a drop in the bucket, and other implicit compliance requirements are more difficult. In this regard, some industry insiders have expressed dissatisfaction, believing that the strict rules increase the administrative burden and are not in line with the actual significance of encryption. For example, the EU authorities have forced special reviews of self-hosted wallets with more than 1,000 euros (1,097 U.S. dollars), which undermines the anonymity of encryption.

03. America’s “anxiety”

Although there are still problems such as anonymity disputes, increased administrative burdens, and lack of supervision of DeFi and NFT, in terms of overall content, this regulatory bill has initially established a complete, feasible, and transparent set of crypto regulatory norms. It not only breaks the status quo of independent countries governing each other and establishes a regulatory coordination plan, but also creates strong conditions for consumer protection and further promotes innovation and development in the crypto field.

For crypto service providers, obtaining CASP means that they can legally provide crypto services in all 27 EU member states. Previously, unlicensed offshore exchanges were required to withdraw from the market, leaving a large market space for local service providers. But on the other hand, the increase in compliance operating costs is inevitable, which will also force some exchanges to leave the EU.

It is reported that after an 18-month transition period, MiCA will be officially implemented in January 2025, but the rules for stablecoins will be implemented after a 12-month transition period and are expected to take effect from mid-2024.

The United States has already been alert. Patrick McHenry, chairman of the U.S. House Financial Services Committee, made it clear that the EU's new encryption regulations MiCA put the region in a leading position in Web3 technology. "Europeans have a technologically advanced legal route that reflects the backwardness of the United States. In terms of technology deployment, we should be a world leader, not lag behind Europe."

Coincidentally, the Hong Kong Securities and Futures Commission recently issued the "Guidelines on Crypto Asset Trading Platforms", which further clarified the regulatory route for virtual assets and made the complementary regulatory structure between the mainland and Hong Kong increasingly prominent.

Just from the perspective of encryption, due to its unique technical and financial attributes, blockchain is not a competition at the level of objects, but a comprehensive competition in the direction of systems. Whoever becomes the place for policy decisions first will have the first-mover advantage. In this context, small regions that can flexibly turn are naturally more advantageous than large countries. Hong Kong, Singapore, and Dubai have already begun to maneuver, and the EU's accession has unexpectedly put further pressure on large countries that have not yet acted.

The United States, which is still at the center of the power struggle, seems to be lagging behind by more than one step.