EU finalises sweeping rules for ‘wild west’ crypto industry

Europe has reached a landmark deal to regulate trading of crypto assets in the bloc, in an effort to rein in what lawmakers call the “wild west” of financial markets.

EU member states and the European parliament late on Thursday settled the terms of rules that aim to protect consumers while allowing the nascent market to flourish.

The rules, known as the Regulation on Markets in Crypto-assets (Mica) represent the first effort to impose standards throughout the bloc, rather than a patchwork of national rules.

It comes after a severe market crash in prices of tokens such as bitcoin and ether dealt a powerful blow to lending platforms, exchanges and fund managers. Since November last year, popular crypto tokens have plummeted more than 70 per cent in value and the size of the market itself has fallen two-thirds to less than $1tn.

“Recent developments on this quickly evolving sector have confirmed the urgent need for an EU-wide regulation,” said Bruno Le Maire, French finance minister.

The standards mean a crypto-asset service provider will require authorisation from one of the EU’s national markets regulators, allowing it to passport its services through the bloc. Local regulators will share information with the pan-European regulator, Esma.

“We will have a new crypto-sheriff in the EU,” said Spanish MEP Ernest Urtasun. The union was “moving from the wild west of unregulated and risky digital assets to a safer crypto sphere”, he added.

Regulated companies will not only face tougher standards to protect consumers but be liable in the event they lose investor funds. The industry — which has often come under fire for its sizeable carbon footprint — also has to disclose information on its environmental impact.

Stablecoin issuers will be required to have a presence within the EU and have a “sufficiently liquid reserve”. They will be overseen by the European Banking Authority. A stablecoin is a type of cryptocurrency pegged to assets such as the US dollar which acts as a bridge between existing financial markets and the crypto world.

Non-fungible tokens, digital tokens that represent unique works like art, have been excluded from the rules unless they fall under existing categories of crypto assets. The European Commission will reassess the proposals over the next 18 months.

“This will bring regulatory certainty, reduce fragmentation and underpin the development of a robust and well-functioning market,” said James Kemp, managing director at AFME, a lobby group for investment banks. However, he added that lawmakers needed to clarify some points, such as the legal requirements for custodians of crypto-assets.

The landmark regulation comes a day after authorities agreed on the Transfer of Funds Regulation (ToFR), which imposes renewed compliance standards on crypto actors to crack down on money-laundering risks within the industry.

Valeria Cusseddu, policy adviser at the European parliament’s committee on economic and monetary affairs, said under ToFR crypto companies would also “have to adopt internal policies and procedures to comply with targeted financial sanctions”. 

“The crypto sphere is rife with risk and open to abuse and attack. We want to ensure that investors will have guarantees of protections for their assets and privacy and we avoid cases like the recent crypto-crash with retail investors losing all of their money because of badly designed products or scams,” Urtasun added.