The most important piece of regulation on cryptocurrencies in the world thus far has arrived: I read through all 405 pages of the “Proposal for EU Regulation on Markets in Crypto-Assets” so you don’t have to. Here are my conclusions.

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I present to you, the most important regulatory framework for cryptocurrencies so far: “Proposal for a Regulation Of The European Parliament and of The Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937”.

First of all, some context. This will be a long post but sometimes long posts are necessary. Bear with me.

The proposed Regulation, the most important one to date for the entire crypto industry, establishes rules for issuers/offerors of crypto-assets (also known as: the foundations, developers and companies behind coins/tokens) and crypto-asset service providers (also known as: exchanges and custodians).

These rules will have to be followed by every entity operating in the European Union. However, because of the “Brussels Effect”, there is a very good chance these rules will become international standards in the end. While everyone is focused on the US and China, the EU is casually leading the way.

The Council of the European Union (all EU Ministers of Finance or Economics) has just given its permission to start negotiations with the European Parliament (basically: things just got real). If they both approve the proposed Regulation, it will become EU law. I expect the Regulation to be voted through relatively easily with only minor amendments. The final legal text to become official EU law will thus be very similar to the current proposal I will be discussing in this post.

The European Union emphasizes that they have an interest in “developing and promoting the uptake of transformative technologies in the financial sector, including distributed ledger technology (DLT)”. They state that this Regulation is meant to: “support innovation and fair competition, while ensuring a high level of protection of retail holders and market integrity in crypto-asset markets, enable crypto-asset service providers to scale up their business on a cross-border basis, and facilitate their access to banking services to run their activities smoothly”. The EU also says that they do not (!) intend to regulate the underlying technology of crypto-assets.

I will now discuss (1) the rules this Regulation sets out for issuers/offerors of different categories of crypto-assets and (2) the rules set out for exchanges operating in the European Union.

Rules in this Regulation for Issuers/Offerors of Crypto-Assets

A) Crypto-assets that are unique and not fungible with other crypto-assets: no regulations

NFTs, including digital art and collectibles are not (!) bound to the rules described in this Regulation, even when these assets are traded in market places and when they have (high) speculative value.

B) Utility Tokens: no regulations

‘Utility token’ means a type of crypto-asset which is only intended to provide access to a good or a service supplied by the issuer of that token (EU definition). Utility tokens are not (!) bound to the rules described in this Regulation, as long as the good or service exists or is in operation.

C) Crypto-assets offered for free: no regulations

Crypto-assets where the receiver does not give money, fees, personal data or commissions to the offerors/issuers in return for those crypto-assets, are not (!) bound to bound to the rules described in this Regulation. This may be good news for Moons (there is no active exchange of personal data in return for Moons; even when Reddit collects personal data from all users).

D) Crypto-assets that are “automatically created as a reward for the maintenance of the DLT or the validation of transactions in the context of a consensus mechanism”: no regulations

These crypto-assets are not (!) bound to the rules described in this Regulation.

E) E-Money (stablecoins): very strict regulations

‘Electronic money token’ or ‘e-money token’ means a type of crypto-asset that purports to maintain a stable value by referencing to the value of an official currency of a country (EU definition). These tokens will be strictly regulated. Only recognized credit institutions and ‘electric money institutions’ are allowed to issue e-money stablecoins. They will have to follow very strict rules (see Regulation Title IV for further details).

F) Asset-Referenced Tokens (stablecoins): very strict regulations

‘Asset-referenced token’ means a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing to any other value or right or a combination thereof, including one or several official currencies of a country (EU definition). This is what Facebook/Meta tried to do with Libra. These tokens will be strictly regulated. Only recognized credit institutions and entities that have been granted permission by the authority of an EU Member State can issue asset-referenced stablecoins in the European Union. They will have to follow very strict rules (see Regulation Title III for further details).

G) Crypto-assets that do not belong to any of the previously mentioned categories (e.g. payment coins that do not promise a stable value or tokens that cannot be seen as utility tokens): some regulations

These crypto-assets face some regulation. The Regulation describes very detailed rules on the contents of white papers and also establishes rules on marketing communications. This is bad news for scams with poorly written, undetailed white papers and those using misleading forms of marketing. The European Securities and Markets Authority (ESMA) will most likely establish templates and standards for white papers in the crypto-industry (see Regulation Title II for further details).

Rules in this Regulation for Exchanges and Custodians

A) Exchanges / custodians (centralized): rather strict regulations

The Regulation focuses on establishing strict rules, such as: the obligation to apply for official authorization in an EU Member States; the obligation to act in the best interest of clients; the obligation for capital requirements, safeguards and insurance policies; the obligation to follow organizational requirements; the obligation to protect the crypto-assets and funds of clients; the obligation to hold the crypto-assets of clients in separate accounts than the accounts belonging to the exchange; the obligation to maintain effective and transparent complaint handling procedures; the obligation to identify, disclose and prevent conflicts of interest; the obligation to have resilient trading systems with sufficient capacity to deal with peak order and message volumes; and much more (see Regulation Title V for further details).

There is, however, a small but concerning statement for privacy coins: “The operating rules of the trading platform for crypto-assets shall prevent the admission to trading of crypto-assets which have inbuilt anonymisation function unless the holders of the crypto-assets and their transaction history can be identified by the crypto-asset service providers that are authorised for the operation of a trading platform for crypto-assets”. What exactly they mean with this and which coins exactly fall under this category still remains to be seen. But I don’t think this comes as a shock for many.

B) Fully decentralized exchanges and DeFi: no regulations (yet)

Fully decentralized exchanges and DeFi protocols are not (!) bound to the rules described in this Regulation. Exchanges that are only partially decentralized may be bound to some of the rules in this Regulation but this is up for interpretation. The EU will, in the next few years, explore whether or not they will regulate this specific space.

C) Self-custody software wallets / hardware wallets: no regulations

These are not (!) bound to the rules described in this Regulation. Remember the huge “EU will ban anonymous wallets” FUD a few months ago? It was all a lie. No rules!

Overall assessment

I am pleasantly surprised. While some of you want nothing to do with regulation, which I respect, this seems very reasonable and a step in the right direction. This text has clearly been written by highly knowledge civil servants and has been endorsed by EU Ministers of Finance with a more open approach to blockchain and cryptocurrencies than their non-EU counterparts. The EU made the mistake of allowing the US/Asia to dominate the tech industry. They do not want to repeat that mistake with the cryptocurrency space.

TL;DR: Cryptocurrency will still be the ‘Wild West of Finance’; but now there will be a new Sheriff in town. And that Sheriff, is the European Union. It does no longer tolerate unregulated stablecoins; it does no longer tolerate shady projects with no utility, crappy white papers, and misleading marketing; and it sure as hell does no longer tolerate unprofessional exchanges who screw EU citizens out of their money. But it does like innovation and it will try not to hinder development in the cryptocurrency and blockchain space because they have made similar mistakes before in other industries.

Link to follow-up on the Ordinary Legislative Procedure: https://eur-lex.europa.eu/legal-content/EN/HIS/?uri=CELEX:52020PC0593

Link to the proposed EU Regulation on Markets in Crypto-Assets: https://www.consilium.europa.eu/media/53105/st14067-en21.pdf

Link to the “Brussels Effect”: https://en.wikipedia.org/wiki/Brussels_effect

Blogs, crypto journalists (you know who you are), etc. are all free to use the info in this post. No need to credit me. I just want people to be informed.

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