MiCA and AML: Another bumper week for cryptocurrency regulation

The last few months for cryptocurrency regulation have been eventful…that may be putting it mildly. So you’ll forgive me for hoping that, while I took a two-week holiday, the markets might settle and regulators would hold off new crypto-related publications. Of course, I had no such luck. In fact, it was quite the opposite.

The week beginning 27 June instead marked a bumper week for cryptocurrency regulation in the EU, comparable to similar events in the US in early March this year. Over the week we saw two key events:

AML requirements were extended to crypto transfers

On the 29 June, the European Parliament and EU member states reached a deal that will implement tracing on the transfer of cryptoassets – known as the Transfer of Funds Regulation (ToFR). Under new rules, which will be aligned with the Markets in Crypto-assets rules (MiCA), cryptoassets will be able to be traced in the same way as traditional, fiat currency transfers can be traced.

These new rules – frequently referred to as ‘the Travel Rule’ – aim to tackle issues of money laundering and terrorist financing within cryptocurrency, which is often touted as a key issue for these emergent currencies. In essence, what this means is that cryptoasset service providers (CASPs) will be obliged to collect and store information about the source of the cryptoasset, as well as its beneficiary – and ensure that information travels along the journey of the transaction and is stored on both sides. CASPs will have to provide this information to regulators or other competent authorities in the event of investigation.

The EU reached an agreement on MiCA

On the 30 June, the European Council and European Council reached a long-awaited provisional agreement on the foundational principles of MiCA. MiCA, it is hoped, will provide a sweeping regulatory framework to “protect investors and preserve financial stability” within the crypto landscape, while simultaneously looking to encourage rather than hinder innovation. MiCA is aimed to level the playing field for crypto regulation across the EU.

Under new MiCA rules, CASPs will need authorisation from one of the EU’s national market regulators in order to operate its services throughout the EU. These national regulators will share authorisation information with ESMA, who has now been dubbed the “crypto-sheriff” in the “wild west” that is crypto.

The crypto industry has often faced scrutiny for the lack of protection that it offers consumers. Under MiCA, CASPs with have far more stringent standards for consumer protection, but will also be held liable in the event that they lost investor funds. In another landmark step, CASPs will have to disclose information on their environmental impact. For those who operate within the Bitcoin space, this could be a sore point given the notoriously damaging effects that the Proof of Work model (on which Bitcoin is founded) has on the environment, it also marks a shift in direction from previous amendments to MiCA.

As we predicted in our latest report, stablecoin issuers are facing the most stringent obligations – likely to prevent large market fall outs as seen in past months. Instead, Stablecoin issuers will now be overseen by the European Banking Authority (EBA) and be required to have a “sufficient liquidity reserve”.

Meanwhile, NFTs and digital tokens have been broadly excluded from the new rules, though this will be reassessed in 18 months.

CUBE comment

This week – alongside the deluge of regulatory activity – CUBE published its latest report – Cryptopia: Regulation & Crypto on a Cliff Edge. The report explores CUBE’s proprietary regulatory inventory of data over the last four years up until April 2022. It’s fascinating to see that, since April 2022, we’ve seen a cascade of regulation on a weekly, sometimes daily basis.

Within that report, we found that despite the emerging pre-eminence of cryptocurrency as a mainstream source of finance, the regulatory landscape remains piecemeal. While some regulations do exist, they do not work as a harmonious, cross-border rule which, given the cross-border, ethereal nature of cryptocurrency, means they serve more to complicate than clarify.

At the beginning of this week, the European Central Bank (ECB) issued warnings to national regulators of getting ahead of themselves and creating solid regulation without harmonisation. The ECB’s Banking Supervisory Board Chair, Andrea Enria, told MEPs that the central bank was seeing “differences in national regimes around crypto”, but emphasised the need for a level playing field. Even in instances of attempted cross-border regulation – the FATF’s Travel Rule, for example – there is still room for interpretation of application. So while there is one rule for all, it can be applied differently depending on country or regulatory choice.

As an aside, a report from the Financial Action Task Force, also last week, revealed that only 29 countries have transposed the Travel Rule into law and even fewer are actually enforcing it.

Last week’s developments for AML, alongside the agreement of MiCA, seemed like exciting progress for many. However, for compliance teams there was a degree of trepidation and confusion. The latest AML agreement from the EU incorporates AML within MICA but unties the Transfer of Funds Regulation from other AML configurations. This means that while ToFR will come into force at the same time as MiCA, it will be separate and distinct. So, instead of creating a more simplified AML procedure for crypto, compliance teams will now need to juggle more regulations with different implementation dates and different permissions dependant on member states.

So, in short, we’re starting to see a regulatory framework for cryptocurrency that is more akin to an unsteady raft rather than a solid, stable ship with which to ride out the choppy seas of crypto. If every country and issuing body worked together to build this ship, they’d have a much greater chance of success.

The regulatory landscape is moving fast, with new legislation published every week. Keep ahead of regulatory change with CUBE.