In the last few years, we’ve seen a global switch towards greater control over the crypto marketplace, and the latest EU crypto regulation is one of the indicators of that trend. The truth is that governments and regulatory bodies around the world that haven’t banned crypto want to regulate it better.
Some of the reasons for planning and implementing security regulations for digital assets, with regulated crypto exchanges as a bottom line, are consumer protection and greater financial stability of virtual currency exchange. Undoubtedly, regulatory oversight of the industry is something many people have been waiting for.
Although some crypto exchange investors may find crypto currency regulations unnecessary or uninteresting, paying attention primarily to trading costs, supported coins, available features, or customer service, crypto currency law is something that they definitely should have on the radar, too. But investor protection in crypto is vital not only for individual users but also for whole crypto markets.
There are many regulatory challenges in the crypto industry – with the correct classification of existing cryptocurrencies topping the list – but this does not mean that efforts to bring order to the cryptocurrency marketplace should be stopped. Quite the contrary – these changes, concerning digital asset depository institutions and investors alike, are not only inevitable but also very beneficial.
Table of contents:
Crypto assets in 2023 – safety facts & figures
Crypto exchange – a marketplace where users buy, sell, and exchange cryptocurrencies – can be a dangerous place, especially for inexperienced investors. What makes it risky, is the cryptoshpere’s extreme volatility and rapid changes in cryptocurrencies’ value, which can result in significant financial losses. Other pain points are fraud and hacks that can also be very costly.
The crypto market – with Bitcoin and Ethereum as the two major cryptocurrencies out of a staggering 22,000 in circulation – constantly faces many turbulences and threats. Users of Coinbase, Kraken, Gemini, Webull, Crypto.com, eToro, and other cryptocurrency exchange platforms (or simply cryptocurrency exchanges) should be aware of them.
The basic problem is crypto assets’ extreme volatility – an issue that can be seen in Bitcoin’s price timeline. For example, in November 2021, the price surpassed the $65,000 level, reaching its high, and one year later Bitcoin wasn’t even worth $17,000.
Another thing is that scams aren’t something uncommon in the crypto sphere – quite the opposite. For example, in the U.S. alone more than 46,000 people lost over $1 billion in crypto to various scams within 18 months starting in January 2021. And this number only covers officially reported cases.
These numbers clearly indicate that the need for making the crypto sphere more secure is urgent.
EU crypto regulation
As for the European Union, virtually all EU countries allow or don’t clearly prohibit crypto activity. Nonetheless, some of their regulatory bodies issue warnings about the risks involved with using cryptocurrency trading platforms.
But the developments of April 20, 2023, may change a lot in the EU’s crypto landscape. It was a momentous day when „the world’s first comprehensive framework for crypto regulation” was approved by EU lawmakers. On May 16, 2023, new rules on markets in crypto-assets – or MiCA crypto regulation – were adopted by the European Council.
EU crypto regulation was accepted due to the urgent need for a comprehensive regulatory framework in the area of digital or virtual currency use. According to the European Parliament, „transparency, disclosure, authorisation and supervision of transactions” are to underpin all new regulations.
But what exactly can we expect from the new EU crypto regulation?
Some of the provisions announced by the European Council and European Parliament include:
- creating a single unified legal framework for the crypto-assets market in the EU;
- protecting consumers better against financial crime (e.g. money laundering and terrorist financing) and market manipulation;
- tracing operations with crypto-assets (just like it is with traditional money transfers) and blocking them when the transaction seems suspicious;
- implementing the „travel rule”, with the information on the asset source and its beneficiary clearly indicated;
- informing consumers about the operation-related costs and risks better.
New regulations will apply to both crypto assets issuers and crypto assets service providers. As for the first group, the new regulatory framework will cover issuers of stablecoins, utility tokens, and asset-referenced tokens. As for service providers, entities such as trading venues and wallets used for holding crypto assets are on the list.
But the EU is not the only group of countries that wishes to make virtual currencies’ use more regulated; another one is the Group of 20. India, the current G20 president, who „wants a collective global effort to deal with problems posed by cryptocurrencies”, managed to gain support for its initiative from the International Monetary Fund and the U.S. in February 2023. We have to wait for the future developments of these G20 crypto regulatory attempts.
Now, let’s have a look at how particular countries see the need to regulate the crypto sphere.
Crypto currency law – other solutions and ideas
Crypto regulations are underway in many countries, and investors don’t know exactly what they’re going to end up with. New rules are to protect them, but the uncertainty regarding the future of the trade of cryptocurrencies makes the crypto sphere even more risky today.
That’s because the scope, depth, and severity of upcoming regulations are still a mystery in many cases, which raises investors’ concerns. The most serious one is a total ban threat, as there are countries – including China, Egypt, Qatar, and Bangladesh – that have banned cryptocurrency completely.
Dozens of other countries and territories have imposed various types of restrictions on crypto use and trade. Many states have chosen to impose a banking ban, with financial institutions not allowed to facilitate Bitcoin transactions. In some countries, on the other hand, it’s legal to trade and hold bitcoins, but illegal to use them as a payment method. Another restriction can be solely a mining ban.
Of course, there are some crypto-friendly states. For example, using Bitcoin is legal in a vast majority of European countries. Some regulators, however, decided that crypto marketplaces must follow Know Your Customer (KYC) policies to comply with anti money-laundering (AML) legislation.
There are many attempts to regulate the crypto currency market – and make it more secure, trustworthy, and predictable. Some countries ponder crypto and Blockchain regulation (with distributed ledger technology), finding existing regulatory frameworks insufficient. On top of that, Stablecoin regulation is slowly moving forward in the U.S.
Protecting digital assets – key takeaways
Cryptocurrencies are not safe havens – and many investors are well aware that it may be very risky to engage with this marketplace. What may be very tempting, is the vision of getting a lot of money fast, as there are examples of people who became millionaires or even billionaires virtually overnight with crypto.
However, the worst-case scenario is very unfavorable – and that is getting broken immediately due to huge price volatility and lack of inherent value. For this reason, more and more regulators try to have an eye on the crypto market – if not banning or restricting, then at least regulating it.
The EU is leading the way, but some countries are working on similar solutions to make the crypto market a safer place. And that’s another reason why investors should tread very carefully as the rules of the game can change completely very soon. Of course, they will win in the long run – as the lack of appropriate regulation and protection can be detrimental to them.
If you want to know more about the ins and outs of crypto currency regulation and make sure to be on the safe side in your fintech project, contact Codete now.