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Comprehensive Regulation by The EU to Crypto Assets Is Now Presented

Comprehensive crypto Regulation

October 22, 2020 | 

JOHN K MWANIKI |  1 Comments| 



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With over 5100 cryptocurrencies available, the crypto sector has recently exploded. It has reached a market capitalization of $250billion and continues to grow. 

The growth in the crypto sector comes with both legal and illegal practices. The legal practices have increased with the entry of several crypto exchanges. Illegal activities have come with the expanding dark market trading—the same with money laundering and evading economic sanctions.

These comprehensive crypto regulations seek to track illegal activities. One of the ways is by monitoring the recent upsurge of Initial Coin Offerings (ICOs). Several new companies are offering tokens for investors in raising funds. These tokens are rarely regulated, thus very risky. The same applies to the emergence of stable coins.

The entrants mean the industry is expanding to more than cryptocurrencies. They are now more of crypto-assets. 

The use of cryptos for financial crimes is a significant challenge. They are usable as they are online, thus transferrable. Their decentralized nature also allows for anonymous usage.

These are all the wrongs the proposed EU comprehensive regulations look to make right. It provides a guideline through which all the member states will operate. 

Key Regulatory Concerns 

  • Stablecoins disrupting financial stability and monetary policy 

The market believed stablecoins were the solutions to crypto volatility. It is yet emerging as one of the top concerns for the industry. It is likely to destabilize the financial system in several ways.

It's backing by a safe asset would lead to a shortage of that asset in some markets. Citizens can also abandon a fiat currency for the stablecoin. This leads to domestic financial destabilization. Successful stablecoins would reduce cash reserves in commercial banks. The banks will have to rely on costly sources of funding. The cost will get to consumers.

The commission is looking for ways to reduce the operations of the stablecoins. It would stop the globalization of stablecoins before regulations.

  • Risks for financial institutions with cryptocurrencies on the balance sheet

The current system allows financial institutions to have cryptocurrencies. The primary concern is the risk when they have the assets in their balance sheets.

The crypto-assets have volatility risks. They are also not as reliable during financial stress. The institution might end und up incurring massive losses.

Even though only a few banks own these assets, they might increase. The commission also proposes the Basel committee on banking supervision for the concern. 

  • The use of crypto-assets for illegal activities 

The use of crypto-assets for money laundering and other illegal activities. The EU regulations look to ensure the safety of crypto space. It wants to regulate custodian wallet providers and exchanges. They would have to follow the same rules as banks and other financial institutions.

They have to register with control authorities and install customer due to diligence controls. They will also track virtual currency transactions. In the end, they have to report any suspicious transactions.

Crypto-assets covered 

Bitcoin and Ethereum are the most popular cryptocurrencies. They have been the coins through which all transactions would take place. Bitcoin accounted for more than 90% of digital transactions in 2019.  The others combined had the remaining market share. 

For now, other crypto utilities are gaining tractions. There is more to cryptocurrencies than a transfer of value. Most companies are now relying on cryptocurrencies to raise funds. They provide investors with utility tokens in exchange for funds.

The commission has expanded the scope of the regulations to cover all the newer assets. It allows for both sovereign and private tokens. The sovereign cryptos are the central banked digital currencies (CBDCs). 

There have prospects of state-backed cryptos to join the expanding crypto world. The EU still is yet to launch its CBDC. The parliament has been looking into its viability for some time. Still, it has to undergo several regulatory hurdles. The commission is for now slow on its regulations.

Among the private crypto-assets, the regulations provide for both cryptocurrencies and tokens. The cryptocurrencies include traditional crypto coins and the stablecoins. The tokens are an investment and utility tokens. Any assets that do not belong to these categories are exempt from the regulations.

The regulations are progressive and are likely to change to accommodate new developments. The first of such changes would be immediately the CBDCs become mainstream. 

Integration into the existing financial regulations 

The financial sector is one of the most regulated industries in the EU. There are existing laws that determine the operations of financial service providers. The proposed rules do not seek to invalidate them. It instead wants to integrate.

The laws will operate such that it only covers the unregulated financial instruments. It would not affect traditional economic systems like shares and bonds. 

These instruments would be free even when blockchain-based. Crypto-assets are more of a new denomination in the classic financial instruments market. 

The laws will affect crypto issuers. For now, most of them trade without much documentation—the new regulations require them to draw a whitepaper. The documents entail all the information about the business. It is the same as the token whitepaper, which details all information about a project.

The regulations will punish insider trading and market manipulation involving cryptos. The move is to increase market integrity. It will, in turn, increase the trader confidence, thus more crypto uptake.

The regulations will also open up the crypto industry for institutional investors. Most of the institutions like hedge funds have not embraced the cryptos. They work under strict rules that do not allow dealing in unregulated assets. They also deal with money from various sources hence wouldn't take too much risk.

With the increased regulations, they are likely to start trading in cryptos. That is already evident from how they embraced Bitcoin and Ethereum futures. 

Bottom Line 

The EU has, at last, presented its comprehensive regulations proposals. The proposal has undergone deliberations. It seeks to streamline the crypto industry and make it investor-friendly.

Some of the significant concerns it seeks to address are on the use of crypto for illegal activities. It also wants to avoid stablecoins disrupting the current financial setup.

In the end, the crypto-assets would become acceptable. 

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