Global Cryptocurrency Regulation Outlook

Recently, the European Parliament and the European Commission provisionally agreed on the proposed regulation aimed at the cryptocurrency market called Markets in Crypto-Asset Regulation (Mica). We can already notice some principles according to which respective authorities around the world will most likely regulate crypto asset projects. MiCA is the first international regulation to come in the largest single market on the planet for cryptocurrency businesses.

The European Union (EU) is poised to be a global pioneer in setting the standards for comprehensive crypto regulation that many other jurisdictions could incorporate into their own crypto legislation or at least use MiCA as a benchmark. Planned regulation on stablecoins in the United States (US) is postponed. However, there is a good chance that US regulations will derive some MiCA principles to at least partially harmonize an international industry such as crypto. This is why it is essential to understand the logic of how European lawmakers want to treat crypto companies.

Today, we can already notice and highlight the critical trends by which international cryptocurrency regulation is very likely to occur.

1. Crypto-Asset Service Providers (CASPs) will be regulated in the same way as financial institutions. Recognizing cryptocurrency providers as a particular type of financial institution will involve several specialized requirements that businesses must adopt. These conditions will include:

  • substantial authorized capital;
  • strict rules for the protection of customer funds (including a company’s legal liability for the loss of those funds);
  • compliance procedures specific to the list of cryptocurrency exchanges;
  • maintenance of reliable cybersecurity systems;
  • good business reputation of the company’s senior management;
  • regular employee training;
  • Directors and Officers (D&O) and/or Professional Liability (PI) insurance coverage;
  • the prevention of market abuse practices (wash trading, insider trading, “pump” and “dump”, etc.) on cryptocurrency exchange platforms;
  • compliance with the rules of the policy on conflicts of interest concerning employees and management of CASP;
  • regular reports on account statements to clients;
  • recording of all customer transactions (including transactions) on the blockchain.

2. Cryptocurrencies will be divided into four types with different rules applying to a specific type of token:

  • stablecoins (also called “e-money tokens”) (linked to a single fiat currency);
  • utility tokens (tokens issued to fund the development of a cryptography project that can also be used to purchase a product or service offered by the issuer of such a token);
  • tokens referenced by assets (linked to a basket of currencies, commodities or crypto-assets);
  • security tokens (crypto tokens that bear the characteristics of a security instrument).

3. Stable Coins will be regulated in the same way as e-money, with the requirement for issuers to hold a certain amount of their own capital, segregate customer funds and comply with reserve capital investment rules (it does not will be allowed to allocate this capital only to highly liquid and low-risk active securities). It is also highly likely that lawmakers will introduce a maximum cap on the volume of daily transactions using stablecoins (as MiCA is already doing), as these tokens could very well pose a threat to national currencies. Features such as low transaction fees, 24-hour network availability, and no bank-like financial oversight of incoming and outgoing transactions are all significant advantages over using currency. traditional fiduciary managed by highly regulated financial institutions. This is a risk that some national governments already understand, so they have started working on their own digital currencies known as
Central Bank Digital Currencies (CBDC). We’ll see how this rivalry plays out; however, it is almost certain that in the future there will be regulatory pressure on stablecoins, making them less flexible and less liquid.

4. Security tokens will be traded on specialized exchanges and will be subject to similar laws applicable to the offering of securities, including prospectus requirements and disclosure of company information. It is highly likely that specialized securitization funds will act as security token issuing entities.

5. Decentralized Finance (DeFi), Decentralized Autonomous Organization (DAO)
and Non-fungible token (NFT) sectors will be subject to the rules against money laundering and the financing of terrorism (AML/CFT). For now, it is still unclear how these rules will apply in practice to these innovative spheres of the crypto industry. Nevertheless, European lawmakers have already expressed their intention to apply AML/CFT rules to DAOs and DeFi that are controlled directly or indirectly, including through smart contracts or voting protocols. Similar financial monitoring rules may also apply to NFTs as, in most cases, they are indeed traceable on the blockchain, technically allowing their origin and transactions to be monitored.

6. Anonymous cryptocurrency will be considered a high-risk asset, which will be difficult to use and convert, as regulated cryptocurrency platforms will likely be prohibited from offering and trading it.

seven. Crypto ‘travel rule’ which requires the cryptocurrency transfer service provider to disclose the identity of the sender of the cryptocurrency to the service provider of the cryptocurrency recipient, will become standard in almost all jurisdictions. Only peer-to-peer transactions from an unhosted wallet (the crypto wallet over which its user retains full control) to another unhosted wallet will remain relatively private means of crypto token transaction.

As can already be seen in the proposed methods of regulating crypto in the EU, the legislative impetus has been given with a fairly understood tone of the proposed rules. National governments will require some level of protection of customer interests from cryptocurrency service providers, responsible issuance of crypto tokens (including its environmental effects from mining mechanisms), and analogous governance for tokenized securities as for the traditional form of this financial instrument. Having control over stablecoins, which threaten a government monopoly to control the movement of national currencies, is also one of the essential aspects of regulatory goals. AML/CFT rules will be fully applicable, including decentralized products. The crypto “travel rule” will make it harder for people and businesses to interact privately with cryptocurrencies.

All of the above is a natural legal adoption of innovative technologies that is needed for the industry to make it safer for customers and more controlled for governments. The cryptocurrency industry can benefit significantly from its widespread regulation as it will make it less risky and therefore more attractive for investment by large institutions and later adopters. An alternative path for the cryptocurrency industry would be a total government ban, a ban on mining, trading, providing services, and any other activity in the industry. However, since this industry has already managed to develop successfully, for national governments it already seems almost impossible to nip it in the bud. Therefore, for lawmakers around the world, the task is to regulate the cryptocurrency industry rather than combat it.


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