Crypto Regulation Takes Centre Stage in Europe Amid Geopolitical Stress

Key Insights:

• The EU proposed the MiCA regulation in 2020 that provides a sound legal framework for cryptocurrencies.
• The European Parliament voted to advance the MiCA bill that proved no bitcoin ban.
• G7 nations have called for a swift crypto regulation discussion amid geopolitical tensions and market fluctuations.

It is evident that the rapid growth of the cryptoassets ecosystem has intensified the focus of regulators. Thanks to innovation in blockchain and the ‘pro-crypto’ mindset of a few governments, politicians, and senators.

However, currently, at the EU-wide level, a regulatory gap contributes to legal uncertainty and weak investor protection. In recent months, the ongoing rising tensions between Russia and Ukraine have been a key driver for regulatory uncertainty. Another catalyst is the recent plunge in the value of digital assets following the crisis of stablecoins – Terra (LUNA) and TerraUSD (UST).

According to Jean-Marie Mognetti, CEO of CoinShares, Europe currently has more complex crypto regulations than other regions, which deterred businesses from growing in Europe, a recent Reuters report said. 

Mognetti organized a letter sent to 27 EU finance ministers on April 13, in which crypto businesses asked policymakers to make sure that their regulations followed the rules put forth by the Financial Action Task Force (FATF). 

With the recent geopolitical tensions and crypto sell-offs, bitcoin (BTC) became extremely fragile, crashing below the $28,000 level and bringing down stock prices. The world’s largest crypto by market cap is struggling to catch up above $30,000.

The recent crash has proved the European Supervisory Authorities’ warning in March that crypto assets are “highly risky and speculative.” Perhaps this is the reason why cryptos are subject to patchy regulation across Europe.

Fragmented Crypto Regulation in Europe

The EU proposed the Markets in Crypto-assets (MiCA) regulation in 2020, the EU’s legal framework to manage digital assets. The 168-page MiCA’s proposal went through several revisions and delays due to controversial language requiring environmental sustainability standards for cryptos.

Stefan Berger, the European Parliament member spearheading the legislation, said in a press release,

“By adopting the MiCA report, the European Parliament has paved the way for an innovation-friendly crypto-regulation that can set standards worldwide. Many countries around the world will now take a close look at MiCA.”

In March, the European Parliament voted to advance a version of the MiCA bill. The move was seen as a big win for cryptos as the parliament did not ban the proof-of-work-based cryptoassets like bitcoin.

A new EU-wide regulation has become a significant “game-changer” and would help the cryptocurrency market build credibility. According to Caroline Malcolm, the head of international public policy and research at blockchain analysis company Chainalysis, this is a huge plus for crypto players who want to be in Europe.

For instance, having European headquarters in Paris, Binance doesn’t have to pursue multiple licenses across separate member states throughout Europe.

The EU bill is likely to take effect in 2024.

Regulation Talks Across Europe

EU has only recently proposed crypto regulation. While some Western European nations have already tried to protect crypto service providers at the national level.

For instance, Belgium used existing EU anti-money laundering rules to introduce a new regulatory regime for virtual currency service providers.

Meanwhile, in Germany, cryptocurrencies are already subject to stringent requirements. Christian Hissnauer, counsel at Clifford Chance’s Frankfurt office, noted that Germany is a fully regulated country when it comes to cryptocurrencies. This is because the country’s Banking Act has made it mandatory for companies that want to do crypto trading, custody, and broker services, to get a German banking license. 

That said, recently, a German financial regulator called for new decentralized finance (DeFi) laws, citing the risk of hacks and frauds.

In an article on BaFin’s website, Birgit Rodolphe, executive director, wrote,

“One thing is clear: the clock is ticking. The longer the DeFi market goes unregulated, the greater the risk for consumers, and all the greater is the danger that critical offers that have systemic relevance will establish themselves.”

Stressing the risks to consumers, she cited that “technical issues, hacks, and fraudulent activity” have seen millions loss.

“Who do I contact if I want to defer my crypto loan? What happens if my crypto assets suddenly disappear altogether? In any case, there is no deposit protection fund for such cases.”

Germany rose to the top spot, securing the place of the most crypto-friendly country in the first quarter of 2022. Another March KuCoin report found that almost half of Germany’s population is interested in investing in crypto.

When it comes to France, the recent Binance (BNB) license approval has made many crypto enthusiasts believe that the country is close to crypto regulation. 

“France is a very strict regulator. But they have the advanced understandings to go with that,” Binance’s billionaire CEO Changpeng Zhao (CZ) told CNBC.

Although the economic power of France is evident, the country’s potential to become a crypto hub has always been debatable. This is because, compared to other European financial centers like London, Zurich, and Frankfurt, Paris has struggled to grab the attention of financial services providers, including asset managers and crypto exchanges.

French Licenses subject to criticisms

Per Daniele Casamassima, a finance and trading professional and CEO of PureCoin, France hasn’t been a big financial hub. He told Finance Magnates,

“Unlike Germany, the UK, Italy, Sweden, Poland, and even Spain, France has never needed to be a very developed country in terms of using financial instruments.”

Maria Stankevich from EXMO crypto trading platform believes that French licenses are not top in the EU region. She noted that Binance needs to develop banking relationships to expand its presence across Europe.

“CZ said that France is uniquely positioned to be the leader of this industry in Europe, which is completely not true. France is a great crypto hub, and I honestly admire the speed of adopting crypto there, but let’s be honest, French license is not number one and not even top-5 on the current market.”

Casamassima added that France has never been a hub for top financial companies or forex brokers. Even in terms of the number of clients, France has not been the primary region.

“So, I don’t see Paris as a new crypto financial hub. Germany, Estonia, Lithuania, and other countries would suit that role better. They’re more crypto-friendly and going to make stronger regulations.”

Last week, the G7 leaders called for tougher financial standards for crypto assets amid the crypto sell-off. Finance ministers and central bank governors discussed for a swift and comprehensive EU-wide crypto regulation. During the meeting, the G7 finance chiefs noted,

“In light of the recent turmoil in the crypto-asset market, the G7 urges the FSB (Financial Stability Board) … to advance the swift development and implementation of consistent and comprehensive regulation of crypto-asset issuers and service providers.”

Before looking into crypto regulations, there is a need to understand what a future dominated by cryptocurrencies could look like. An EU-wide framework is  inevitable to regulate crypto with a common approach.

On the other hand, an unregulated crypto space would just trigger misunderstanding and potential abuse of the innovation. It is important that consumers are adequately aware of the dangers of investing until cryptos are properly put into law.