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European Union First Rule for Cryptos

EU rules for crypto

October 20, 2020 | 

523 Views | 

JOHN K MWANIKI | 

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The European Union has given out a landmark proposal to regulate cryptocurrencies. The new regulations will ensure the seamless operations of the crypto assets. 

The proposal covers all the crypto assets. It also considers the ones currently not regulated and stablecoins. 

The regulations will also have an impact on volatility and investors' certainty. It will also reduce market fragmentation in the region. This allows a crypto trading company approved in one EU state to operate in any other EU state.

Valdis Dombrovskis, executive vice-president of the European Commission, believes in embracing digital transformation. He also believes in the mitigation of potential risks. "A digital and innovative single market for finance will benefit Europeans. It is also key to Euro's economic recovery," he says. "It will deliver better financial products for consumers and also open up new financing channels for businesses."

Content of the Proposal

The Regulation on Markets in Crypto Assets (MiCA bill) is a detailed cryptocurrency proposal. It seeks to clarify what a crypto asset is and any other token. It also provides ground rules for crypto-asset custody. It then defines the relationship between the token issuers and holders.

The bill requires all virtual currency service providers in the region to have a physical presence in the EU. This is to ensure ease of reach for customer support. As it also looks out for investor safety. It does this by aligning capital requirements and a mandatory complaint holder procedure.

The new regulation, when passed, will replace some of the existing national ones. Some countries like Spain and Germany have elaborate crypto rules. They will be willing to merge in the new financial system

When successful, the new laws will spur financial innovations. It will make the EU the best place for crypto investment. The rules will also consider how to leverage existing financial regulations.

Some companies will try out the procedures in a controlled environment. The system is a sandbox and has been successful in other times across the EU.

Strict Regulations on Stablecoins 

Even though becoming popular, virtual currencies still suffer from volatility. The volatile nature of cryptos means one can never be sure of their asset value. Also, the changes in the crypto asset values are so rife; it can happen within minutes. Some traders have found this as a reason to avoid digital currencies.

The need for stability has led to the rise of the Stablecoins. These are cryptocurrencies that have their value tied to that of a fiat currency. Instead of the ever-changing crypto value, their value is like that of fiat. 

Even though the coins had an earlier rave, they have come under scrutiny. There have been concerns about the lack of reserves to back these cryptocurrencies. This is an issue for most people who had thought they are the safest entry to cryptos. Tether, for example, has had to reassure the clients of its stability and backup.

The strict regulations on the Stablecoins also affect the proposed Facebook's Libra. The project announced last year has had several challenges. It has forced Facebook into several postponements of the launch

Libra was planning on having several fiat currencies backing it. This is a possible disruptor in the financial world. For these, the new EU regulations look to ensure the consumers get a real deal.

Facebook has come under scrutiny before over their handling of data. There have been reports of the company selling data to unauthorized third parties. This has then been used for targeted political campaign messages and adverts.

Libra has faced a backlash from both regulators and consumers. It will only work when regulators become assured of consumer protection.

When will the Rules Come into Effect?

Even though the rules are already outlined, it will take some time before coming into effect. The EU involves several countries that must be in unison. The first part is to get the rules through the legislative assembly.

Afterward, every country must debate on the regulations. Once all the countries pass the recommendations is when they become rules. This is where it will take some time. Different states have varying timelines. They also have varying parliamentary procedures.

The EU executive believes the legislative process will take some time, at least a year. He told CNBC, "The legislative process will take time, at least a year. It might even be longer. It depends on the priority it receives from member states and the European Parliament."

Implementing the Rules in Relations to Brexit

Even though the rules are set to govern most companies, there have been concerns about funding. For a long time, the EU has been the financial hub in the world. This is fast changing following Brexit. As the top financial country, missing UK is not great for implementing the EU crypto strategy.

Earlier on, the commission had been planning on a Capitals Market Union. The plan came in earlier with the UK as part of the organization. With the changes, other companies are now considering leaving the EU. They want to set up in the UK not to miss on the previous financial access.

The EU is already looking for plans to ensure the success of the Capital Union Markets. It is considering moving on with it soon enough. 

Also, the commission is not blocking companies from getting funding from other sources. The companies are free to receive financing from the UK and the United States.

The commission wants to make the process seamless by encouraging cross-border investments. It also wants harmonized insolvency rules among the member states and consistent regulations. This proposal is also subject to approval by the European lawmakers and governments.

Bottom Line

The European Union is looking to be a top digital currency destination. Its commission has been at the forefront of setting up regulations governing the cryptos. So far, it has provided proposals on transactions and token insurance.

The proposal would form a framework for crypto-asset adoption within the region and beyond. It first seeks to define what the crypto assets are. It then goes to detail a framework for the relationship between the digital and fiat currencies.

The regulation also involves token issuers and receivers, and other service providers. It will cover the repercussions of market abuse. In the end, it seeks to ensure efficient payments and support systems.

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