Surprising Twist for Crypto Regulation in the EU
Eurointelligence wrote about the Surprising Twist for Crypto on December 3.
Decentralised finance happens to be one of the few high tech areas where the EU is doing quite well. Last week the Council adopted its position on proposed crypto market regulations for Defi products. They are very industry-friendly.
The proposed regulations are the most important to date for the European crypto industry because they establish rules for issuers, or the developers and companies behind tokens, as well as crypto-asset services providers, or exchanges and custodians.
Happily for the EU industry, the new regulations do not apply to non-fungible tokens, NFTS. Nor do they apply to utility tokens, meaning any crypto asset that provides access to a good or service provided by the issuer. Crypto-assets that are offered for free, airdrops, are also exempt. Crypto assets automatically created as a reward for maintaining the blockchain on which they operate are also unregulated.
It’s a different story for stablecoins. The EU remains attached to the idea of launching its own central bank digital currency. Whether pegged to a fiat currency or basket of currency or assets, any form of stablecoin will be under strict regulation including a ban on earning interest, and a requirement for all issuers to be granted permission by the relevant national authority.
Fully decentralised exchanges are not subject to these rules, most likely because, as we’ve been arguing, it would be impossible to enforce them.
In another pleasant surprise for the industry, self-custody software and hardware wallets do not fall under the new regulations either. Earlier announcements that the EU planned to ban anonymous wallets appear to have been premature: there seems to be a growing recognition in the EU of what is and is not possible in Defi and crypto.
Belgian Politics Synopsis
Please consider the Most Important Piece of Regulation on Cryptocurrencies
The most important piece of regulation on cryptocurrencies in the world thus far has arrived: I read through all 405 pages of the “Proposal for EU Regulation on Markets in Crypto-Assets” so you don’t have to. Here are my conclusions.
I present to you, the most important regulatory framework for cryptocurrencies so far: "Proposal for a Regulation Of The European Parliament and of The Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937".
A) Crypto-assets that are unique and not fungible with other crypto-assets: no regulations
NFTs, including digital art and collectibles are not (!) bound to the rules described in this Regulation, even when these assets are traded in market places and when they have (high) speculative value.
B) Utility Tokens: no regulations
‘Utility token’ means a type of crypto-asset which is only intended to provide access to a good or a service supplied by the issuer of that token (EU definition). Utility tokens are not (!) bound to the rules described in this Regulation, as long as the good or service exists or is in operation.
C) Crypto-assets offered for free: no regulations
Crypto-assets where the receiver does not give money, fees, personal data or commissions to the offerors/issuers in return for those crypto-assets, are not (!) bound to bound to the rules described in this Regulation. This may be good news for Moons (there is no active exchange of personal data in return for Moons; even when Reddit collects personal data from all users).
D) Crypto-assets that are “automatically created as a reward for the maintenance of the DLT or the validation of transactions in the context of a consensus mechanism”: no regulations
These crypto-assets are not (!) bound to the rules described in this Regulation.
E) E-Money (stablecoins): very strict regulations
‘Electronic money token’ or ‘e-money token’ means a type of crypto-asset that purports to maintain a stable value by referencing to the value of an official currency of a country (EU definition). These tokens will be strictly regulated. Only recognized credit institutions and ‘electronic money institutions’ are allowed to issue e-money stablecoins. They will have to follow very strict rules (see Regulation Title IV for further details). Edit 1: As part of these strict rules, it seems that EU citizens would also not be able to earn interest on stablecoins, as pointed out by u/TheWerewolf5. Edit 2: it will take a while before this is all signed into law so exchanges still have a few years to phase out Tether for regulated stablecoins. There won't be a sudden Tether apocalypse.
F) Asset-Referenced Tokens (stablecoins): very strict regulations
‘Asset-referenced token’ means a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing to any other value or right or a combination thereof, including one or several official currencies of a country (EU definition). This is what Facebook/Meta tried to do with Libra. These tokens will be strictly regulated. Only recognized credit institutions and entities that have been granted permission by the authority of an EU Member State can issue asset-referenced stablecoins in the European Union. They will have to follow very strict rules (see Regulation Title III for further details).
G) Crypto-assets that do not belong to any of the previously mentioned categories (e.g. payment coins that do not promise a stable value or tokens that cannot be seen as utility tokens): some regulations
These crypto-assets face some regulation. The Regulation describes very detailed rules on the contents of white papers and also establishes rules on marketing communications. This is bad news for scams with poorly written, undetailed white papers and those using misleading forms of marketing. The European Securities and Markets Authority (ESMA) will most likely establish templates and standards for white papers in the crypto-industry (see Regulation Title II for further details).
Link to follow-up on the Ordinary Legislative Procedure: https://eur-lex.europa.eu/legal-content/EN/HIS/?uri=CELEX:52020PC0593
Link to the proposed EU Regulation on Markets in Crypto-Assets: https://www.consilium.europa.eu/media/53105/st14067-en21.pdf
Link to the "Brussels Effect": https://en.wikipedia.org/wiki/Brussels_effect
Blogs, crypto journalists (you know who you are), etc. are all free to use the info in this post. No need to credit me. I just want people to be informed.
Belgian Politics Overall Assessment
I am pleasantly surprised. While some of you want nothing to do with regulation, which I respect, this seems very reasonable and a step in the right direction.
Cryptocurrency will still be the 'Wild West of Finance'; but now there will be a new Sheriff in town. And that Sheriff, is the European Union. It does no longer tolerate unregulated stablecoins; it does no longer tolerate shady projects with no utility, crappy white papers, and misleading marketing; and it sure as hell does no longer tolerate unprofessional exchanges who screw EU citizens out of their money. But it does like innovation and it will try not to hinder development in the cryptocurrency and blockchain space because they have made similar mistakes before in other industries.
This text has clearly been written by highly knowledge civil servants and has been endorsed by EU Ministers of Finance with a more open approach to blockchain and cryptocurrencies than their non-EU counterparts. The EU made the mistake of allowing the US/Asia to dominate the tech industry. They do not want to repeat that mistake with the cryptocurrency space.
No Interest on Stable Coins
I agree with the Assessment by Belgian Politics especially on stable coins like Tether allegedly backed one-for-one by US dollars.
I also agree with the assessment of Eurointelligence that it was surprising twist that the EU seems to have gotten correct.
But as one final point, stable coins pay interest now by lending assets. And lending assets will have to stop.
The stable exchanges need to make a profit, so they will have to charge a fee either for moving funds in and out or have overall service charges.
Meanwhile in Congress, Elizabeth Warren, Maxine Walters and the democrats are bickering over everything from Amazon to Facebook to Tether.
Thanks for Tuning In!
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