By Viktoriia Omelianenko

The rapid development of crypto-assets within the financial system over the last few years is a tale about how authorities can encourage innovation whilst ensuring proper risk management for the sake of investors. The collapse of FTX and other crypto players during 2022 illustrated a high degree of interconnectedness, volatility and unsound business practices in crypto-asset markets. It also showed the need to have prudential, investor protection and market integrity requirements for crypto-asset service providers.

EU approach

The EU reached a political agreement on its Markets in Crypto-Assets (MiCA) Regulation in June 2022 and is finalising the text. Beyond our borders, recent turmoil in crypto markets have reinforced calls for a global crypto rulebook. As European Commissioner Mairead McGuinness said at the World Economic Forum on 19 January, “there is no point in Europe being on its own, because this is a global development, and we can't put barriers on it”.

The EU is one of the first major jurisdictions worldwide to introduce a comprehensive regulatory framework for crypto assets. Most of these assets are currently unregulated, or in some instances subject to national rules.

MiCA will therefore bring the crypto-asset market under financial services regulation. The aim is to promote the soundness of the entire crypto-asset market by providing consumer and investor protection, setting the necessary organisational, operational and prudential requirements for crypto-asset service providers, and preventing market abuse. This will in turn limit the risks to consumers, market integrity and financial stability.

That being said, many crypto-assets will, even if regulated, remain speculative instruments and should be reserved for investors with a specific risk appetite. Consumers need to understand the risks involved in crypto-assets before they invest. The European Supervisory Authorities have issued several warnings in this regard. MiCA will ensure that this information is provided to all potential retail investors before they get involved with these sorts of assets.

MiCA, complemented by anti-money laundering rules in the Transfer of Funds Regulation, will provide a robust regulatory framework that will provide the necessary legal clarity upon which the market can further develop on a sounder footing. It will become fully applicable in the EU 18 months after it enters into force. But crypto-assets are global, and our approach should be global, too.

International cooperation

International cooperation will be key if we are to effectively regulate crypto-assets. A global agreement on crypto-assets should first ensure that no product remains unregulated. Second, supervisors should collect and exchange information globally. Third, any agreement must protect retail investors. Fourth, the crypto ecosystem should fully integrate environmental considerations.

In the United States, after the collapse of FTX in November 2022, Secretary of the Treasury Janet Yellen said: "The recent failure of a major cryptocurrency exchange and the unfortunate impact that has resulted for holders and investors of crypto assets demonstrate the need for more effective oversight of cryptocurrency markets.” US authorities are considering introducing a regulatory framework for crypto-assets.

Crypto-asset regulation is already on the agenda of the G20’s Financial Stability Board (FSB), which in October published draft policy recommendations on how to regulate crypto markets. The initiative aims to ensure that crypto-asset activities are subject to new or existing financial laws, including supervision, information exchange, disclosures, governance and risk management. The G20 Finance Ministers and Central Bank Governance meeting in February can take this agenda forward to the next level.

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Viktoriia Omelianenko is a Blue Book trainee at the European Commission