New EU rules will give crypto investors more protection

Tighter rules will give crypto investors better protection, and regulators elsewhere could follow suit.

The EU has agreed new rules for bringing crypto under regulation, in a landmark move to tame the sector.

A new law, known as Markets in Crypto-Assets (MiCA), is the first concrete proposal for creating a comprehensive regulatory framework for digital assets.

It’s likely to act as a benchmark for other regulatory regimes as well as pile pressure on the UK and the US to act soon.

Crypto is unregulated in the UK, although companies operating in the country must register with the watchdog, the Financial Conduct Authority.

This comes at a time when Bitcoin has posted its worst quarter in more than a decade and exchanges and brokers are pausing withdrawals as crypto prices continue to crash.

While more regulation has been on the cards for years, the timing of the announcement comes at a precarious time for the market.

So what has the EU chosen to focus on? And what impact is MiCA likely to have?

MiCA law

The new rules focus on stablecoins – which are usually tied to the dollar or a more “stable” commodity such as gold – and transaction reporting. The regulator, the European Securities and Markets Authority (ESMA), will also have more powers to enforce actions on crypto providers which don’t protect investors.

Firstly, reserve requirements for stablecoins will be beefed up. The collapse of TerraUSD brought into sharp focus the risks associated with stablecoins. Under the new rules – set to come into force at the end of 2023 – stablecoins like Tether and USDC will be required to maintain higher reserves in order to meet redemption requests in the event of mass withdrawals. Stablecoins that become too large will also face daily transaction limits.

Companies which issue or trade crypto such as stablecoins will have to provide in-depth information about risks and charges.

The new law would also reduce anonymity for certain transactions. So transfers over the €1,000 (£858.73) threshold between exchanges and “unhosted wallets” would need to be reported. Firms will also need to disclose their energy consumption and the impact of digital assets on the environment.

Finally, ESMA will have the power to ban or restrict crypto platforms if they are not properly protecting investors or if they threaten market integrity. In practice, this means that crypto exchanges operating in the EU should have systems and security protocols that meet Union standards. If they don’t, then the ESMA has the power to step in and stop the sale or distribution of tokens.

Market impact

The EU’s presence in the crypto market is less than that of the UK or the US. So while these plans are a step forward in regulating crypto, only time will tell what the impact will be on the market.

The importance of MiCA lies mainly in how it provides a benchmark for regulators elsewhere. The UK has already indicated that it wants to remain a significant crypto centre, but regulation is still undecided.

Meanwhile, the US Senate unveiled its Responsible Financial Innovation Act in June 2022 which proposed a regulatory framework that would classify most digital assets as commodities. The bill also focused on protecting stablecoin users, suggesting that stablecoins should be 100% backed by reserves and that issuers should be required to provide disclosure on their reserve asset holdings.

Industry reaction

Some crypto players have welcomed the EU’s announcement. Richard Gardner, CEO of exchange solution provider Modulus, said it was “well past time for a guidebook so that operators can act with intention”.

Coinbase CEO Brian Armstrong branded the news “positive” and said: “This will likely be a model for other countries to follow.”

Armstrong’s comments come as the exchange looks to expand its presence outside the US. It is seeking licences with various countries including Spain, Italy, France, the Netherlands and Switzerland.

However, sceptics have said that the new regulation will prove to be negative for coiners and stifle the market – which is already struggling.

Further regulation in the crypto market seems to be inevitable. The agreement of concrete rules that cover all companies operating in the EU is the first step.

The instability of recent months has proved disastrous for many. So this news could come at a good time for restoring some confidence in the market.