The European Union Is Seeing A Flood of Cryptocurrency Regulation. A Good Thing For The Crypto Market?

For some time now countries have explored regulating crypto-asset market with little or no relevant progress 

But it appears that everything is about to change. 

On September 24, 2020, the European Parliament and the Council published a proposal to regulate crypto assets in the markets. Now after many months, the talks have commenced with the council allowing negotiations with the European Parliament to proceed. What this means is for the first time, we may have real regulation on cryptocurrencies.

The proposal is part of the European Commission's Digital Finance Package. It was adopted on the same day as part of the EU banking sector's Digital Finance Strategy.

This proposed regulation defines the rules for issuers of crypto assets. It will affect foundations and organizations utilizing digital currencies along with crypto asset service providers.

This is arguably the most important regulatory push to date for the entire cryptocurrency industry. If and when it’s fully codified, every entity operating in the European Union, including exchanges and custodians, will be obliged to follow these rules. 

While not popular in many circles, this regulatory development signals an important inflection point for the space, triggering what many are calling the Brussels Effect. 

We first came across the term in 2012. Its creator was Columbia Law School professor Anu Bradford. According to Bradford, most of the attention involving world affairs is focused on the United States and China when in reality it’s really the European Union that controls the global milieu. We are discovering that this is certainly true in terms of crypto regulation as the EU quietly leads the way and sets new standards. 

Once a law or protocol is adopted by the EU, the rest of the world tends to follow suit. This is because if anyone wants to operate within the European Union, they must adopt the laws. 

Bottom line — if the aforementioned proposal is adopted, there is a high probability that it will end up becoming an international standard.

Assessing The Aim of The Regulation

This regulation was designed to support innovation and fair competition. The aim is to ensure a high level of protection for retail holders and market integrity. 

If approved, it would allow crypto service providers to expand their business on a cross-border basis. It could also create more accessibility when it comes to banking services. This way, service providers and exchanges can run their businesses smoothly. 

The proposal is divided into two types of rules. In other words, there are rules for issuers of different categories of assets and for exchanges operating in the European Union.

Cryptoassets that are unique and fungible along with utility tokens are not subject to regulation. Neither are crypto assets that are offered for free. Likewise, rewards for DLT maintenance or transaction validation will also not be regulated. 

There is, however, one group that will be heavily regulated: stablecoins. Those which are marked as E-Money and Asset-Referenced Tokens will have severe regulations. 

Only recognized credit institutions will be able to issue stablecoins of any kind. This is because creating EU-stablecoins without any backing could be destabilizing. 

Also, inhabitants of the European Union will not be able to earn interest on any stablecoin. 

Finally, not just any credit institution will be able to create them. To mint stablecoins, such institutions must be initially approved by the European Union.

Centralized exchanges and custodians will also have some regulations. Yet, these will not be as strict as with stablecoins.

In terms of fully decentralized exchanges, they won't be regulated yet. Similarly, DeFi and self-custodian software wallets/hardware wallets won't be either.

Are Regulations Bad For Crypto?

At first glance, the regulations certainly don't seem so bad. The intention of the European Union seems to be in preventing the printing of stablecoins without any backing. In short, they want to prevent Europe from becoming the wild west for cryptocurrencies.

The way the rules are structured in the proposed regulation could be very beneficial to the cryptocurrency industry. Additionally, it could cause a Brussels effect resulting in such rules being adopted internationally. 

Last but not least, cryptocurrencies will continue to operate as usual. The idea of this regulation is not to alter the way these platforms work and function. Also, such regulation could take quite some time before reaching enforcement. The biggest aim is to try to protect its citizens from becoming victims of possible fraud. 

This regulation is a great step because it shows that the European Union understands where they need to go. They will probably create better regulations after this one.

The truth is that the market still dislikes regulation. But regulation might be necessary to have a healthier crypto ecosystem. So stay tuned. 

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