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Why and how should the EU build crypto-regulation to foster innovation and protect users?
Read more about the EU's digital transformation
Part of the attraction of crypto-assets
is avoiding the need for a central register and institution, enabling
safe and simple transactions between two parties without an
intermediary. However, this, together with a lack of regulation-
(crypto-assets are currently out of the scope of EU legislation -
creates substantial risks.
When dealing with crypto-assets, people are not covered by EU consumer protection
rules and are often not well informed about the risks, which could mean
they lose money. The widespread use of crypto-assets without regulation
could drive financial instability, market manipulation and financial crime. As transactions are largely anonymous, cryptocurrencies are widely used for criminal activities. In the wake of the Ukraine war, EU countries limited trade with crypto-assets for use in Russia or with a Russian entity.
The technology uses huge quantities of electricity, resulting in a high environmental footprint. According to estimates, the energy consumption of bitcoin equals that of a small country.
Read more about the Green deal and the EU's actions against climate change
The EU is working on new rules to boost the potential of crypto-assets and curb the threats: Markets in Crypto-Assets (MiCA). MEPs have reviewed and amended the European Commission's proposal and in March 2022 decided to begin negotiations on the final shape of these rules with EU countries in the Council.
In order to encourage the
development and use of these technologies, the new rules aim to provide
legal certainty, support innovation, protect consumers and investors and
ensure financial stability.
The rules cover transparency, disclosure, authorisation and supervision of transactions. MEPs want the issuing of some of the tokens to be supervised by the European Securities and Markets Authority and the European Banking Authority. Businesses dealing with crypto-assets will have to better inform consumers about risks, costs and charges. By regulating public offers of crypto-assets, the rules would ensure financial stability, while other measures tackle market manipulation, money laundering, terrorist financing and other criminal activities.
To reduce the high carbon footprint of crypto-currencies, MEPs are asking the Commission to prepare new rules to include any crypto-asset mining activities that contribute substantially to climate change in the classification system for sustainable activities.
After the MEPs negotiate the final shape of the bill with EU governments, it must be adopted by the Parliament as a whole as well as by EU countries.
The new rules are part of a wider
Digital Finance package that supports the EU's digital transition by
encouraging innovation while ensuring protection. In March 2022,
Parliament adopted new rules to support testing of the distributed ledger technology in market infrastructures.
In April 2022, Parliament agreed to start negotiations with EU countries on rules that would allow the tracing and identification of transfers of crypto-assets, to prevent their use in money laundering, terrorist financing and other crimes.
Crypto-assets
are digital assets that can be used as a means of exchange or for
investments. Unlike traditional banking, there is no need for a central
register - they are based on distributed ledger technology that enables
transactions to be recorded securely by a network of computers. They are
private; not issued or guaranteed by a central bank or public
authority. "Crypto" in their name hints at security - they are secured
with cryptography.
The first crypto-assets were bitcoins, introduced in 2008 as a cryptocurrency
- a payment method alternative to central bank-issued currencies. By
2020, there were 5,600 different cryptocurrencies with an estimated
global value of €250 billion (still a relatively small share of the
value of all money). This generation of crypto-assets is generally not
backed with assets that hold intrinsic value and their value is often
quite volatile, which limits their practical use, turning them into a
form of risky investment rather than a useful currency.
Tokens are newer
crypto-assets; they are a digital representation of interests or rights
to certain assets. They are typically issued to raise capital for new
entrepreneurial projects or start-ups.
The introduction of new products such as stablecoins that
could be a more stable payment method as their value is backed by real
assets brings new possibilities for innovation and use on a larger
scale. With that, larger threats appear.