Regulating crypto and cyberware in the EU

Crypto currency matters are seemingly in the news every day, but the EU’s attempt to introduce a tailor-made regulatory regime is not. A draft regulation is currently before the European Parliament and Council of the European Union for adoption in the coming months, setting down a dedicated framework for crypto-assets, stablecoins and digital money, and the related trading platforms and virtual networks. Only authorised providers will be allowed to offer crypto currencies in the EU, and they will need to have an EU registered office. As a corollary, the EU also intends to regulate and supervise the digital resilience of financial institutions. If adopted, the EU’s ‘crypto regulation’ will be the first act by an international institution to regulate this sphere. In this policy brief, we note:

• The lack of a common approach across countries for a global phenomenon such as crypto, and the profound differences with the US, which regulates crypto as a security under existing securities laws, whereas the EU is creating an entirely new regime, rendering implementation and user interpretation more difficult, and creating confusion across regulatory regimes;
• Diverse approaches enable regulatory arbitrage and a race to the bottom, where the providers are the winners, and the investors the victims;
• Much remains to be done to render the crypto world more transparent, in single data feeds, but also in the development of commonly agreed valuation and accounting methods, let alone the issue of taxation;
• The crypto hype emphasises the need for a more efficient network for international payments, outside the realm of the global reserve currencies;
• The new proposals considerably increase the tasks for supervisors: in a complex set-up, national and European authorities will need to authorise and supervise virtual asset providers, and control ICT suppliers of the financial sector;
• Crypto is often associated with money laundering, mostly through third country providers. Strong international cooperation in the ‘cryptosphere’ is needed to detect criminal networks, but this is where the lack of a common global regulatory approach matters.

To European policymakers, we recommend:

• Clearer definitions of crypto assets in the draft EU’s Markets in Crypto Assets (MiCA) regulation, and close alignment with existing rules;
• A simplification of the EU supervisory architecture for crypto assets, and a greater role for the European Supervisory Authorities in licensing and supervising crypto schemes;
• To advance the debate on transparency in the valuation of crypto assets;
• Enhanced international cooperation on crypto assets to tackle money laundering, fraud and the criminalisation of international payment networks;
• The need for more awareness raising and debate of the EU’s efforts in this domain.

Karel Lannoo is General Manager of ECMI and CEO of CEPS