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The 15 observations proposed By European to framework crypto-assets

european crypto framework

October 20, 2020 | 



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The European Union is taking steps to become one of the premier crypto destinations. The Union is establishing a comprehensive regulatory framework for digital currency operations.

The commission recently published its digital finance strategy. It involves the facilitation of distributed ledger technology (DLT) and crypto-assets.

The new publication will include the earlier recommendations from the commission. These were to streamline the regulations of markets in crypto-assets (MiCA). It was would also reach the entire digital financial services market. 

Here are the 15 observations on the European Commission's proposal for the crypto-assets; 

1.    A harmonized framework 

The commission understands the crypto-assets are new entrants in the financial markets. Yet existing regulations are controlling the existing markets. Any new changes need to be in line with the existing regulations.

The commission itself had already provided earlier suggestions. Both proposals should align with precise results. Already there are running proposals like a targeted change to MiFID II. The other option is the temporary regulatory sandbox pilot regime.

The different organizations within the financial set up must also be in agreement. For example, the commission must align with the European Securities Markets Authority (ESMA). Any uncertainty within the provisions makes the crypto supply more difficult.

2.     Harmonizing and Legitimizing Non-regulated Crypto-assets 

Several new digital currencies keep getting into the market. The earlier regulations don't capture them in their scope. The new regulations seek to look into all the digital currencies within the MiCA. It will cover tokens, electronic money, and any other electronic financial instrument. 

The regulation also seeks to harmonize the laws within different European countries. For example, Germany and France currently have varying levels of considering tokens. Once harmonized, the laws will help in the application of anti-money laundering rules.

The new regulations will come with a harmonized least disclosure rule. It also has the requirements for crypto-asset service providers and market integrity measures. 

3.    Balancing between Supporting Innovation and Regulating 

One of the reasons for the popularity of digital currencies is decentralization. There has been no central authority to control the crypto operations. Still, there has been a concern about the operations of cryptos for illegal activities. The regulations are now necessary to ensure consumer protection.

The regulations seek to ensure market integrity and financial stability for the crypto-assets. The new regulations are also significant for investors. They do not limit crypto use in the EU. It also looks to ease some limiting rules in some EU states. For example, a country like Germany only permits stablecoins with a ratio of 1:1 to fiat; it allows all. This brings us to the next recommendation.

4.    Special regulations for Stablecoins 

The volatility of the cryptocurrency has been an issue of concern for most users. This has led to the creation of the stablecoins. According to the EU commission, a stablecoin is a crypto-asset used for payments. It maintains a stable value with one or more currencies. The underlying assets can also be commodities and other crypto-assets. It can also draw stability from a combination of all those assets.

The stablecoins comes with the risk of destabilizing the financial markets. It can also challenge the existing monetary policy. For that, the commission seeks to give it special consideration.

While the commission intends to treat it like any crypto-asset, it will have additional rules. The supervision of stable coin issuers and e-money would be under EBA.

5.    Regulating the Three Types of Stablecoins

The commission understands there are three types of stablecoins. Each stable coin comes with a specific regulation.

They include;

  • Algorithmic stablecoins 

These are cryptocurrencies that do not draw stability from fiat currency or commodity. It aims to maintain stability through protocol thus does not change in value with demand. They do not undergo the special stablecoin rules.

  • E-money tokens 

This is a crypto-asset that draws its stability from a single fiat-currency. They work as a means of exchange. Such token already qualifies as assets within the existing regulations.

  • Asset-reference tokens 

It is a crypto-asset that draws stability from one or more commodities. Its primary purpose is for exchange. 
The commission provides new regulations within the new proposals. 

6.    More Scrutiny for Stablecoin Issuers

In the same case with stablecoins, its issuers also come under increased scrutiny. The issuer must meet the regulation standards. They must also have the authorization by a competent national authority.

The issuer must meet all the governance arrangements with a particular focus on IT. It should also ensure safe custody of funds it receives and its own funds' requirements. Its complaints handling and qualifying holding procedures must be at par.

7.    Provisions for Crypto-asset issuers other than stablecoins

For some time now, it's only crypto-currencies that have been providing whitepapers. All crypto-asset issuers will start publishing whitepapers. The document will detail the intent to offer the public the services. It will also request for admission to a trading platform.

The only exemption is when the issuers' suppliers only qualified investors. Having less than 150 investors per member state also counts.

The issuers also have other compliance requirements on honesty, fairness, and professionalism. All these should be in the best interest of the crypto holders.

8.    Leeway for Regulated Crypto-companies 

The commission acknowledges the existence of crypto-companies working in the existing regulations. It exempts them from having to follow all the new regulations. For example, they don't have to follow the whitepaper rule.

The laws instead allow these companies a transition of 18 months. After this, they should have gotten new licenses. 

For crypto-companies running under existing national rules, they can establish simplified procedures. 

9.    Market Abuse Rules 

The regulations provide rules on non-compliance. Failure to meet the required standards by the crypto users has repercussions.

10.    Treating e-money token like e-money 

The commission seeks to treat e-money token as e-money. This is to avoid regulatory arbitrage between the assets. Issuers of e-money token must observe similar regulations to e-money. 

Users can only redeem e-money token through cash or credit transfer. That is, the redemption must be in the form of a fiat currency. The tokens also have a limited time for redemption.

11.    Efficient International Payments 

The proposal looks to make cross-border payments easier through the EU. It seeks to ensure faster, accessible, and more affordable payments within member states. The method should also be transparent and convenient.

The commission seeks to improve remittance by reducing the costs of the services. It will also support Single Euro Payment Areas in the neighboring countries.

12.    Efficient Payment Systems and Support Infrastructure 

The commission seeks to ensure access to proper payment infrastructure. It seeks to review the settlement finality directive if it should cover e-money. 

The commission also seeks to review its provisions on technical infrastructure. 

13.    Low Flexibility for Third-country Providers 

The commission seeks to provide a similar competitive ground. Still, the third-country regimes are not comparable to other regulations. The crypto-asset service providers have to be incorporated into the EU. Only the issuers are exempt from the provision. 

14.     Enabling a European Open Data Space 

The commission understands the role of data in the crypto space. It seeks to promote data-driven innovation within the financial sector. It promotes access to and data sharing through open finance. 

It seeks to achieve open finance within the EU by 2024. For that, it hopes for enactment by mid-2022. It will build on the European Data Strategy to ensure development.  

15.    A blueprint for the future of the crypto market 

The commission had provided a detailed proposal that, when successful, will be the way to go. It has worked in the interest of the crypto issuers, holders, and service providers. It also provides exemptions based on the existing laws.

Still, this is not the final piece to the regulations' needs. The digital currency world keeps growing. The commission is willing to embrace the changes.

For now, these proposals are good enough for the industry. It is likely to form the basis of crypto regulations moving into the future. 

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