Crypto-asset markets are at the heart of disruptive change and policy attention these days. Recent weeks and months have seen significant market corrections. The price of bitcoin is falling to levels of 2020 and before, and the collapse of a so-called “algorithmic stablecoin” – which has not been subject to proper regulation and supervision – has sent shockwaves through markets, with worries about contagion also spreading to traditional financial markets. While some see this as the end of the crypto hype, others see it as a healthy correction to eliminate unsustainable businesses and make crypto markets more resilient for the future.

Whatever the assessment of current developments, it is clear that crypto markets are a more and more relevant part of the international financial system, with related risks for investors, market integrity and potentially financial stability, but also opportunities for innovation.

To bring more transparency for investors, while still allowing for innovation, the EU has just agreed on new rules to regulate crypto-asset markets. The crypto-asset industry will be able to develop further, based on a sound regulatory framework that will also ensure transactions are not used for money laundering or terrorism financing.

Markets in crypto-assets

On 30 June, co-legislators reached a provisional agreement on the Markets in Crypto-assets Regulation (MiCA), which aims to protect consumers, market integrity and financial stability.

The MiCA framework covers issuing of crypto-assets that are not already regulated by other EU financial legislation as well as providers of services related to such crypto-assets. Crypto-asset service providers will need to be authorised by a national competent authority. This will allow them to passport their services throughout the EU.

While providing mainly disclosure and transparency requirements on issuing ‘unbacked’ crypto-assets, MiCA sets out stricter requirements for issuers of ‘stablecoins’. Both types of stablecoins (asset-referenced tokens and e-money tokens) require authorisation and must be established in the EU. Most importantly, both have a reserve requirement, which means the issuer must hold in reserve the same asset as their reference and for the same amount as the total amount of crypto-assets issued.

Algorithmic coins would not meet these criteria and could therefore only be marketed as general, ‘unbacked’ crypto-assets. These crypto-assets would not be able to claim that their value is pegged to an official currency.

Stablecoins that claim to be stable vis-à-vis other assets – such as fiat currencies, commodities or other crypto-assets – will be considered asset-referenced tokens. Holders of asset-referenced tokens will have a redemption right against the issuer, and thus asset-referenced tokens will need to be fully backed by a reserve of assets and be subject to prior authorisation and supervision.

Significant asset-referenced and e-money tokens will fall under close EU supervision, which will be carried out by the EBA. This will encourage greater confidence and reduce the likelihood of market turbulence.

Last but not least, MiCA will put in place adequate protection for all consumers as they go through authorised exchanges, wallets and trading platforms to buy, trade and transfer crypto-assets. MiCA includes a number of measures to increase transparency in crypto markets, such as publication of crypto-asset white papers that inform potential holders of the characteristics of the issued crypto-asset, the monthly publication of data on the number of tokens in circulation as well as the mandatory commissioning of independent reserve asset audits.

Consumers will be granted a right of withdrawal for 14 days after purchasing crypto-assets other than asset-referenced tokens and e-money tokens. Crypto-asset service providers will also be liable in case they lose investor funds.

Finally, MiCA will introduce an obligation for issuers of crypto-assets and trading venues to disclose information about the environmental impact of the crypto-assets they offer.

MiCA sets common rules on crypto-assets in the EU. It is also the first framework of its kind when compared to major international jurisdictions. The US and the UK among others are also working on regulatory frameworks for crypto-assets. The EU will continue reaching out to international partners and step up cooperation in relevant fora such as the FSB, G7 and FATF.

Transfer of Funds Regulation

Bringing more transparency to crypto-asset markets also means making sure that crypto transactions are not being used for money laundering or terrorism financing purposes. Addressing the risk of money laundering and terrorist financing is crucial to create trust in our financial system.

This is why the EU has frontloaded the negotiations on the Transfer of Funds Regulation (TFR), a part of the July 2021 Anti-Money Laundering package, to synchronise progress on both MiCA and TFR.

On 29 June, a provisional agreement was reached on the TFR. The new rules will require crypto-asset service providers to include clearer information about the sender and beneficiary in transfers of crypto-assets. The TFR recast does not impose any specific technical solution on the crypto-assets transfers operators. This should make it more ‘future-proof’ in a rapidly evolving environment.  

With these new rules, the EU and its member States will also have a legal framework fully in line with the international standards on crypto-assets traceability, in particular with the Financial Action Task Force’s “travel rule” standards, and could become a source of inspiration for other jurisdictions that still need to implement them.

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