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March 16, 2022 | Jennifer Clarke
EU votes for crypto rules to ‘boost benefits and curb threats’, does not ban bitcoin
The European Parliament’s Economic and Monetary Affairs Committee has voted in favour of new rules that would look to “boost benefits and curb threats” for crypto across the EU. However, despite last minute amendments to the proposed rules, the Committee did not vote in favour of measures that would, in effect, ban Bitcoin and Ethereum from the EU.
As cryptocurrency bleeds into the mainstream of financial services, the EU Parliament has considered new rules that look to encourage a greater understanding for crypto – from the benefits to the risks and sustainability alongside it. Voting unanimously in favour of new rules, with 31 votes to 4 (and 23 abstentions), the Committee endorsed the creation of a uniform legal framework for crypto assets across the EU.
Cryptocurrency, as it currently stands, is neither issued nor guaranteed by central banks. This means it generally falls out of scope for regulators and EU legislation in turn. As a result, consumers have little protection in the event of market fluctuation or manipulation. With this in mind, the EU Parliament have voted to put in place a framework that will level the playing field across the EU with greater understanding of the risks and rewards of crypto.
The rules endeavour to “boost users’ confidence for crypto” and support the development of digital services and alternative payment instruments. Commenting on the outcome of the vote, lead MP Stefan Berger said:
“By adopting the MiCA report, the European Parliament has paved the way for an innovation-friendly crypto-regulation that can set standards worldwide. The regulation being created is pioneering in terms of innovation, consumer protection, legal certainty and the establishment of reliable supervisory structures in the field of crypto-assets. Many countries around the world will now take a close look at MiCA.”
In particular, the draft rules consider the environmental sustainability of crypto, alongside the risks that it poses to consumers and the supervision that is required.
Environmental effect of cryptocurrency
It is broadly accepted that cryptocurrency has a negative effect on the environment, with the energy outputs needed to mine and validate the process deeming it an unsustainable practice.
As a result of this vote, MEP’s have asked the European Commission to formulate a legislative proposal to include any crypto-mining activities that contribute significantly to climate change in the EU taxonomy (a classification system) for sustainable activities.
MEP’s have asked that this legislation be put in place by 1 January 2025 in order to address the high carbon footprint of cryptocurrencies.
Consumer protections and supervision
Over the last year, scare stories of market manipulation and consumer vulnerability for crypto have become common place. The EU Committee’s rule looks to manage crypto in a way that will support market integrity and financial stability, including the regulation of public offers.
Under the new rules, consumers will be better informed about the risks involved in crypto investments, as well as the cost and charges that sit alongside it. Moreover, the rules will bring in measures to tackle market manipulation and prevent money laundering, terrorist financing and other criminal activities that stem from crypto.
In order to orchestrate this, MEP’s have proposed a new supervisory structure under which the European Securities and Markets Authority (ESMA) supervise the issuance of asset-references tokens, while the European Banking Authority (EBA) will oversee electronic money tokens.
Proposed rule banning bitcoin is rejected
Prior to the vote on Monday 14th March, there was speculation that the European Parliament’s Economic and Monetary Affairs Committee could vote in favour of a rule that would, in effect, see Bitcoin banned across the bloc. Over the weekend, a last minute amendment had been made to the proposals, which would restrict the use of cryptocurrency that are powered by ‘proof-of-work’.
What is ‘Proof of Work’ (PoW)?
Proof-of-work is the mechanism used to confirm transactions and add new ‘blocks’ to the ‘chain’. It is a process harnessed by Bitcoin and Ethereum and is a notoriously energy intensive process as it requires a number of participants in the PoW blockchain network to simultaneously compete against one another to solve a cryptographic algorithm. The more computers that try to solve the algorithm, the more complex it becomes. This means that it requires a huge amount of power and energy to fuel the computers in order to validate the blockchain.
Despite concerns across the crypto community, the MEPs did not vote in favour of this rule, opting instead to approach sustainability within crypto from a broader, less reductive standpoint.
What happens next?
EU governments across the bloc will now enter into negotiations around the final wording of the Bill.
We currently stand at the precipice for crypto. What started small has grown – once embraced on the fringes of financial services it is now seeping into the mainstream. Over the last few weeks alone we’ve seen developments that might previously have defied belief: Santander introducing crypto-based loans for agriculture and individuals buying and selling houses through NFTs.
Regulators and governments are presents with a challenge; to adopt a fear-based model that restricts crypto and prevents its adoption or to cautiously embrace it with regulation that encourages innovation but protects consumers and markets. Last week, President Biden signed an Executive Order which appeared to endorse the second approach. This week, the EU Parliament’s vote on new rules suggests that we will see a similar approach in the EU.
This is likely a good approach. Strict regulation that precludes crypto from the mainstream would likely push it into the shadows, allowing for bad actors the thrive. We’ve arguably come too far to stop crypto in its tracks. Instead, this open and inquisitive approach will help take financial services forward, will welcome creativity and innovation, and will better understand the risks. The more we understand risks, the better chance we have of mitigating or preventing them.
The sustainability of crypto is a difficult beast, and somewhat contradicts what many see as a new and libertarian currency. Indeed, crypto is new and innovative, but is also proving hugely destructive and backwards in the amount of power and energy it uses to survive. An article in a journal by Joule in February predicted that bitcoin is responsible for 65.4 megatons of Co2 annually, which is comparable to the country-level emissions of the whole of Greece. While it might be changing the future face of finance, it is changing the face of the earth for the worse.
Many will therefore welcome the fact that these new rules look to bring crypto under the EU taxonomy for sustainable activities by 2025. And no doubt many will breathe a sigh of relief that the Committee did not vote in favour of banning PoW, However, if EU regulators genuinely want to meet their 2025 goal and want to continue on a path to meet net-zero emissions, there is still the change that PoW will come under further scrutiny in the years ahead.
What is most welcome, especially from the viewpoint of the compliance team, is the EU’s aim to adopt a “uniform legal framework for crypto”. If true uniformity in regulatory approaches and regulation is adopted, compliance teams will face a far less resource-intensive task when implementing these new rules.
The regulatory landscape for crypto is changing fast across the globe, with governments and regulators tentatively lifting the lid on cryptocurrencies in mainstream finance. Keep ahead of the regulations that could effect you business with CUBE.