Like many other developed economies, countries in the EU have adopted a proactive and progressive approach to cryptocurrencies. It has admitted its openness to cryptocurrencies but has equally been vocal about the requirement for strong regulations to avoid potential abuse by criminal entities and terrorists.
In this article, we will discuss the evolution of the cryptocurrency regulation framework in the European Union (EU), with a special focus on recent developments such as the European Commission’s proposed regulation on Markets in Crypto Assets (MiCA). We will also discuss how crypto businesses in the EU can comply with changing regulations by using cutting-edge technologies.
Are Cryptocurrencies Legal In The EU?
Cryptocurrencies are legal throughout the single-currency region, however legislation governing crypto exchanges differs by member countries. Cryptocurrencies are subject to capital gains taxes ranging from 0% to 50% in member nations.
The European Commission is now looking to address this fragmented nature and set up a framework, allowing companies that received licence in one member country to operate anywhere in the region.
Notable Regulatory Developments
When cryptocurrencies were trending as alternative payment and investment options in early 2010s, the EU started giving guidance and analysis on potential threats and regulatory needs about these digital assets.
The EU’s Fifth Anti-Money Laundering Directive (5AMLD), which came into effect in January 2020, brought cryptocurrency-fiat currency exchanges under the scope of its anti-money laundering (AML) legislation. The directive required crypto exchanges to perform customer due diligence measures and to fulfil standard reporting requirements. In addition, crypto businesses in the region have to register themselves with local authorities.
The Sixth Anti-Money Laundering Directive (6AMLD), which came into force in December 2020, broadened the list of money laundering predicate offences. The updated list included cybercrime, making compliance measures more stringent for cryptocurrency firms.
In July 2021, the European Commission came up with four legislative proposals. The fourth proposed legislation would help trace transfers of crypto-assets and limit large cash payments. With the regulation, in accordance with the FATF Travel Rule, the EU looks to prevent the crypto-asset sector from being abused for financial crimes.
To file a suspicious transaction report as per the Travel Rule, the EU has set a threshold of €1,000, in line with the FATF recommended guidelines. The rule also applies to transactions where an asset appears to be linked to other transfers amounting to €1,000.
The proposal states: “given that virtual asset transfers are subject to similar money laundering and terrorist financing risks as wire fund transfers, they must also be submitted to similar requirements, and it appears logical to use the same legislative instrument to address these common issues.”
Following a European parliament and council discussion, the plans are scheduled to be operational by 2024.
Current Legal Status Of Cryptocurrencies And Exchanges
At present, the EU classifies cryptocurrencies and crypto-assets as qualified financial instruments (QFIs). Therefore, banks, credit firms or investment firms in the region can hold and gain profits from crypto-assets under the EU laws. They may also legally offer services in crypto-assets and cryptocurrencies.
However, regulators such as France’s Autorite des Marches Financiers (AMF), Italy’s Ministry of Finance and Germany’s Financial Supervisory Authority (BaFin) have set up registration requirements for crypto businesses.
The EU Looks To Unify The Bloc’s Cryptocurrency Regulations
In recent years, the EU has taken initiatives to harmonise the European regulations of digital assets. In September 2020, the EU Commission proposed the Market in Crypto-Assets Regulation (MiCA), which laid out rules that regulate the region's stable coins and crypto asset providers.
Under the new rule, all crypto issuers will have to first publish a whitepaper and send it to their national supervisory authorities twenty days before the first issue. It also has rules against insider trading and market manipulation on crypto exchanges.
On 14th March, 2022, The European Union parliament’s Economic and Monetary Affairs Committee voted in favour of the MiCA framework. According to an official statement, the new framework aims to boost users’ confidence and support the development of digital services and alternative payment instruments.
The parliament will now negotiate with the EU governments on the bill's final shape.
What Does The New Crypto Policy Mean?
No ban on bitcoin
The draft had a provision to limit the use of cryptocurrencies that rely on the energy-intensive consensus mechanism termed as proof-of-work. Had come into effect, it would have banned bitcoin, the most popular cryptocurrency, across the EU.
In order to reduce carbon footprint relate to crypto operations, the parliament committee has now accepted an alternative provision that would require the European Commission to come up with a proposal to include any crypto-asset mining activities that contribute substantially to climate change in the EU taxonomy for sustainable activities by 1st January, 2025.
Supervision of crypto assets
The committee wants the European Securities and Markets Authority (ESMA) to supervise the issuance of asset-referenced tokens, and the European Banking Authority (EBA) to supervise electronic money tokens. In addition, the framework supports market integrity and financial stability by regulating public offers of crypto-assets.
Consumer protection
The provisions in the draft require those who are issuing and trading crypto assets (including asset-referenced tokens and e-money tokens) to ensure transparency and disclosure. As such, consumers would be better informed about risks, costs and charges related to cryptocurrencies. In addition, the draft includes measures against market manipulation and to prevent money laundering, terrorist financing and other criminal activities.
Using Tech To Stay Compliant
Crypto service providers need to have a well-designed AML compliance programme to adhere to all existing and emerging regulations. This should be a well-balanced combination of compliance personal and technology. Having an in-house compliance team may be feasible only for large financial institutions. However, this is usually very expensive and impractical for smaller firms. They would have to rely more on highly intelligent process automation tools and platforms to sift out illegitimate transactions from large data sets.
We have created a first-of-its-kind AFC Network to effectively solve the shortcomings of the present AML transaction monitoring environment.
Through collective intelligence and continual learning, our AML solution provides a novel means of identifying money laundering. Financial institutions will be able to capture shifting customer behaviour and stop bad actors with high accuracy and speed using this advanced machine learning approach, enhancing returns and risk coverage.
It detects suspicious cases and prioritises high-accuracy notifications without requiring personal information. We use this technique to combat money laundering related to cryptocurrencies successfully. Our solution can be scaled to cover any typologies spanning products, places, tactics, and predicate crime for the purpose of locating cryptocurrency-related funds.
Speak to one of our experts today to learn about our solution and how it helps companies that handle crypto remain compliant.
