Crypto regulation: EU vs. US
This week has been a rollercoaster for the two sides of the Atlantic when it comes to crypto regulation.
President Biden signed an executive order on responsible Crypto regulation in the United States. The executive order will provide banks a regulatory framework to transition into the world of crypto and meet the demand that many Americans have to get Bitcoin and other cryptocurrencies directly from their banks.
In tandem, the European Parliament voted Monday to advance a version of the Markets in Crypto Assets bill (MiCA), which is a regulatory framework developed in 2018 to help regulate currently out-of-scope crypto-assets and their service providers in the EU. While the bill is still a work in progress, Monday’s vote included a rejection on a ban of proof-of-work cryptos (PoW), which includes BitCoin.
Blockchain and crypto startups are now worth almost $500B globally, from more than $100B in 2020. US has created 3x more value than Europe in the sector, with almost $200B and slightly more than $60B respectively. While, Europe is lacking in the Web2 wave with American companies like Google, Apple, Amazon, Meta, Airbnb, Twitter, and Uber dominating their sector.
The crypto sector has been calling for more regulatory clarity for quite some time. Blockchain and crypto is a relatively new and quickly evolving space, which poses challenges for regulators to balance innovation fostering and consumer protection.
This week’s events mark a turning point for the future of crypto in the US and EU.
US Crypto Executive Order
Biden’s signed an executive order on digital assets on Wednesday, outlining the “first-ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology”.
The order acknowledges the impressive growth of the sector and its strategic importance for the US. Around 16% of adult Americans – approximately 40 million people – have invested in, traded, or used cryptocurrencies and more than 100 countries are experimenting with Central Banks Digital Currencies (CBDCs).
The executive order also focuses on climate and national security concerns and orders different parts of the federal government to coordinate their efforts to craft guidance for the rapidly growing industry, but refraining from setting specific policy objectives beyond consumer protection, responsible innovation and financial stability.
The Biden Executive Order has six policy objectives in its regulatory approach to digital assets:
- Consumer protection
- Financial stability
- The use of crypto for illicit crimes
- U.S. competitiveness
- Financial inclusion
- Responsible innovation
The executive order has been praised by both Democrat and Republican lawmakers, as well as several regulatory agencies. “The US must maintain its leadership in this space, which is why lawmakers and regulators should do nothing to harm America’s long-standing tradition of fostering technological innovation” according to Sen. Pat Toomey.
Until now, digital assets in the US had no specific regulatory framework and have been regulated according to existing laws, especially around securities. The Securities and Exchange Commission (SEC) – led by Gary Gensler – has been fighting the sector, with notable moments like the legal fight with Ripple and the Coinbase lending notice. Hopefully, a coordinated approach of the different regulatory agencies under the will bring more clarity and ensure the growth of the sector.
EU PoW ban
The EU Parliament voted on Monday against the de-facto POW-ban: 33 against, 25 in favour.
Just before the weekend, a motion for a proof-of-work ban in Europe appeared again in the EU proposal for the regulation of crypto-assets (MiCA). Lawmakers and environmental activists have been pushing for regulation on crypto mining since at least November of last year, citing what they viewed as energy-intensive crypto activity stemming from PoW.
The proposal would have meant all service providers, crypto and fintech companies would have been forbidden to offer Bitcoin, Ethereum (as of now), and many other crypto-assets. That fueled a strong reaction from the crypto industry, notably Ledger’s stance on financial freedom.
A new amendment has passed stating that:
- Mining will be likely no longer be addressed within this MiCA regulation.
- Mining will be added to the EU sustainable finance taxonomy and regulated there by 2025. If POW will be classified as unsustainable under the taxonomy (very likely), mining companies will have a much harder time getting money from European investors, companies, and governments. But crypto businesses like exchanges, custodians, etc offering services on top of POW-based coins should not be directly affected.
Overall, a very positive development for the crypto and web3 ecosystem in Europe!
EU MiCA regulation in details
According to the last public version of the proposal released in Sept 2020, MiCA divides crypto-assets into 3 categories:
- Asset-referenced tokens (from Libra to DAI)
- E-money tokens (from Paypal to fiat-backed stablecoins)
- Other crypto-assets.
The proposal introduces safeguards on asset-referenced tokens – such as DAI, safeguards for customer protection (from insider trading to private early token sale to investors and others before public listing), capital requirements for service providers, custodians and exchanges.
The issue is that the crypto space evolves very fast and the bulk of the MiCA proposal has been developed in 2018-2019.
Some missing things:
- NFTs were nominated only once in the entire proposal. MiCA requirements will in fact not apply if the crypto-asset is unique and not fungible with other crypto-assets. This segment was almost negligible at the time but has since grown enormously with over $25B in sales in 2021 and $5.2B of VC funding since last year.
- Nothing on crypto lending and borrowing: this is one of the riskiest areas in crypto, especially centralized providers for not crypto-savvy consumers attracting with rewards and high rates.
- DAOs were also not covered in the original proposal.
Some changes in these areas are being discussed as amendments. The risk is to rush in adding a few last less well-thought adjustments to cover these topics. The other face of the coin is leaving a regulatory hole around key areas of growth for digital assets.
What’s next for MiCA?
Formal negotiations on the draft framework will now proceed between the European commission, council and parliament.
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