To safeguard consumers, investors, and the market itself, the EU has for the first time put forward laws for bitcoin service providers. These measures will also promote fair competition and financial stability. The EU aims to ensure compliance among all member states by putting in place a legal framework. The goal of the new legislation is also to end the anonymity of these assets, which have been widely exploited by sanctioned people and criminals to conceal their money. With the market capitalisation of cryptocurrencies reaching $1.7 trillion in March 2022, it is essential that digital currencies are well regulated. The steep market declines since March underline the point. Those declines have led to more than 3,000 people working in cryptocurrency being laid off, including 1,180 staff at Coinbase or 18% of their workforce.
There are unnecessary levels of danger and unpredictability because the cryptocurrency industry is now mainly uncontrolled. As a result, the market may adopt better procedures and develop a greater sense of trust thanks to the new proposed EU standards. Additionally, all EU member states will apply the legislation, which is a significant improvement over the existing EU system in which some nations have cryptocurrency regulation and others do not.
How will the regulations work?
With any new regulations coming into practice, it is imperative that organisations have a base level of knowledge and an understanding of the requirements. These proposed EU regulations are split into two categories: Markets in Crypto Assets (MiCA) and Transfer of Funds Regulation (TFR). Some considerations for both of these categories include:
- They are focused on regulating unbacked crypto assets and is designed to prevent crypto crashes, such as the high-profile TerraUSD crash which cost the market $200 billion in a single day. According to MiCA, cryptocurrency issuers must maintain a sufficient liquid reserve to honour redemption requests meaning that fluctuations in value are limited. Plus, to operate in a given country, issuers must obtain permission from a national financial authority. Across the EU, the European Banking Authority will create and maintain a register of non-compliant users. This list will reduce criminal activity through cryptocurrency and also put a stop to repeat offenders across EU borders.
- They are designed to combat anonymity risks through increased Know Your Customer (KYC) Regulations which are implemented to determine the customer’s identity and allows institutions to assess the customer’s risk profile. The goal of TFR is anti-money laundering and counter-financing of terrorism. This regulation is in line with the ‘Travel Rule’ from the Financial Action Task Force which requires financial services providers to trace cross-border transfers which are often used by international criminals as a way of sending money internationally to fund terrorism or other illegal activity. TFR also requires the personal data of all parties to be recorded, no matter the size of the transfer. If the personal details of any party are requested by the authorities, cryptocurrency platforms must provide these details. Before releasing assets, it is the responsibility of the platform to ensure that the beneficiary has not been subject to sanctions. These regulations currently only apply to cryptocurrency stored on platforms rather than held by an individual.
Why are the regulations necessary?
Businesses and financial services organisations now have a role to play in ensuring that cryptocurrencies and crypto assets are managed properly and cannot in any way be used to support crime or fraudulent behaviour. This is because these assets are not issued by a bank or central authority. Businesses handling cryptocurrencies must put systems in place to record and monitor all parties involved in transactions in order to comply with these new rules. This implies that cryptocurrency platforms are now in charge of handling and storing highly regulated consumer data. In the longer term, this will allow cryptocurrency to be adopted more widely and will promote consumer trust and stability of the market. However, in order to be ahead of the curve with this regulation, businesses must look to proactive solutions to protect their reputation and that of customers from future harm.
Although Brexit separated the UK from the EU in 2020, so far cryptocurrency regulation between the two has been similar. Currently there are some indications that UK regulation could even become more stringent than that of Europe, which is something that any organisations with dealings in the UK will have to be mindful of. For example, in 2022, the UK Treasury tightened regulations for cryptocurrency advertising to bring it in line with other forms of financial asset promotion, highlighting a shift in government attitude as cryptocurrency comes into the mainstream.
How do financial services companies implement this?
Following the adoption of the new legislation, financial services organisations that handle or conduct cryptocurrency transactions will bear a greater burden for data storage and adherence to regulatory body requirements. Compliance teams need to be proactive and well-organised in order to react to the changes and assure best practise. Teams are therefore increasingly seeking to data-driven, highly automated solutions. They want to reduce the possibility of human error and spare IT personnel from having to sift through a colossal volume of data. Businesses must utilise the resources at their disposal in order to run as smoothly and securely as feasible.