EU Regulation on Crypto-Assets First Look

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The European Union has been the leading region when it comes to crypto regulations. It seeks to be the top destination for crypto investments and related services. The European Union is already streamlining the industry by forwarding regulations. 

The commission has presented several proposals for stabilizing the crypto economy. The first of the proposals is a draft on the comprehensive regulation of crypto assets. The draft is "Markets in crypto-assets (MiCA)" regulations. It will most likely come into effect by the end of the year and apply to all Member states.

These regulations are some of the most extensive ever. It covers all cryptocurrencies, even some currently not covered in the existing rules. It also includes the stablecoins.

The proposal aims to reduce volatility. This will go a long way in ensuring investor confidence due to certainty. It also seeks to reduce market fragmentation as the rules will apply to all the member states.

Generally, the proposal is to spearhead digital transformation while mitigating risks. 

Some of the main components of the proposal include; 

Defining the crypto assets 

As a new asset, most people don't understand what to make of cryptos. They don't know what to consider a crypto-asset and what not to. The law comes in to give a defining component of the digital currencies. It also understands these definitions are not harmonized to date.

It provides for crypto-assets as a digital representation of value or rights. These can be transferred and stored electronically using ledger or similar technology.

The distributed ledger is a technology that supports distributed recording of encrypted data. Electronic money token is a crypto-assets whose main aim is for exchange. It maintains value by referring to a fiat currency of legal tender.

The regulations will ensure the different jurisdictions follow the laws. It enhances more understanding and harmonization of the rules.

Still, the MiCA laws provide for exclusions. The laws do not apply to crypto-assets that qualify as financial instruments. Same to deposits as directed by the European parliament and council. The exception also includes structured deposits and securitization by the same entities.

It also does not include the European central bank and the central bank of member states.

Harmonization of national laws 

Given the virtual currencies have been in operation, different countries already have national regulations. The new regulations would not wish to clash with the existing guidelines. Still, there is a concern as the other countries have varying provisions.

Some countries also allow crypto assets to run unregulated. The proposed EU regulations will override the existing national laws. 

Complying with the different regulations has been costly for multinational crypto service providers. They often have to adapt to every individual state. The process is also time-consuming.

The harmonized regulation reduces uncertainty and uncertainties for the service providers. 

Tough times for Stablecoins 

One of the significant risks that come with cryptocurrencies is volatility. The decentralized nature of cryptos is that it does not rely on any single entity. Unlike fiat currencies, no one determines the demand. It instead depends on demand and supply laws. This has seen it become so volatile, with some users shying away from embracing it.

To reduce uncertainty, stablecoins seem the best solution. These are the crypto coins that draw their value from other commodities. Some of the possible commodities are fiat currencies and gold. So far, USD has been the leading commodity in which stablecoins draw value. Tether, for example, is equal to 1 USD.

There have been concerns about the security of the stablecoins. Concerns have been rife on the fact that such coins don't have reserves. Tether has had to defend itself over such allegations. These new regulations seek to ensure consumer safety from such issues.

The other concern is the potential of stablecoins to disrupt the money economy. They could substitute the fiat currency as the preferred means of exchange. It can also be widespread as most people accept the digital economy. 

The regulations seek to make it hard for the stablecoins to take over. It will make it harder for them to become mainstream.

What do the regulations mean to the industry?

The industry varies on the need for crypto regulations. Most of the earlier investors joined the sector due to its decentralized nature. It is, however, becoming challenging to let the cryptos operate unregulated.

The crypto-assets pose many risks to the users. There are concerns about the use for illegal activities. 

Its possible use is for money laundering, drug trafficking, among other crimes. The regulations look to bring sanity to the cryptocurrency industry. 

The new laws also will help in creating legal certainty. The current set up is such that any company can release an ICO without any documentation. This puts investors at risk of losing investments. A regulated environment means only legit tokens will go to the market.

The regulations also support and encourage innovation and development in the industry. Most people are not willing to get into the market when consumers are pessimist. However, they would be willing to take part in a controlled market. They would also be happy in a system where everyone understands their roles.

More consumers and investors will be willing to take part in the crypto market. Most of the potential users have been shying off due to the uncertain nature of the market. Most of the investors want a case of assured return on investments. The market will achieve this financial stability once the regulations come in place.

Bottom Line

The first-look at the EU crypto-asset regulations paints a market waiting to explode. It is all that remains for the market to become more prosperous. The investors and users are waiting for a stable market. The service providers are also looking for the scope of their work.

The regulations might take time before coming into effect. It will take almost a year before streamlining. 

It still requires member states' ratification and harmonization. Still, this is the way to go. It will also push the need for regulations in other countries. 

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