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Tough Times Facing Stablecoins And Startups Because Of EU Regulations

EU regulations

October 23, 2020 | 

JOHN K MWANIKI |  1 Comments| 

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The cryptocurrency world is at an all-time high acceptance. It has significantly gained traction over the past few years. 

This is because of its ability as an alternative investment. It provides a backup from the now derailing traditional stock market.

Even with the growth, the volatility concerns of cryptos persists. The decentralization means no authority determining supply hence susceptible to market changes. Bitcoin and other cryptos are also not backed by any commodity.

The volatile nature has made it hard for institutional investors to join the fray. Other private investors also find it hard following the uncertainty. That is where the stablecoins come in. They operate like any other cryptocurrency but with the stability of a fiat currency

Stablecoins draw value from other fiat currencies or commodities. They can also draw it from a combination of commodities. From there, its value tallies with the underlying asset. Tether, for example, correlates with USD at a ratio of 1:1. The cost of the Tether is always the same as that of the dollar.

The stablecoins are essential in connecting crypto with the fiat world. It helps as a medium of exchange. Still, they also come with challenges. The new EU regulation proposals look to cut the obstacles.

Stablecoin Regulations

Stablecoins for some time looked like all the crypto world needed to prosper. They connect the digital and the traditional economy. At the same time, they come with lower transaction costs in cross-border transactions. Still, they are a threat to the global monetary policy and financial stability. 

An asset that backs a stablecoin becomes more valuable. It gains more demand leading to a shortage. Thus, destabilizing the world supply chain. A successful stablecoin would also see most people abandon traditional fiat currencies. This causes domestic financial instability.

The digital nature of stablecoins also means people won't need commercial banks. This would reduce global deposits on the banks. They are, in turn, forced to look for other costly financing options. Still, the coins themselves can face a challenge in case of lost credibility in the future.  

With all these possibilities in mind, the EU wants to ensure financial stability. For that, it makes it harder for the stablecoins to succeed. It wants to keep the current monetary control under the government, instead of private companies, if stablecoins were to become mainstream.

The first step for the regulation is to discern Euro and non-Euro stablecoins. The non-Euro stablecoins is a threat to the Euro as a fiat currency. It then places other far-reaching requirements before launching and operating a stablecoin. Even the stablecoins that are already relevant will have to meet newer standards.

New Start-up Regulations 

The companies in the digital currency sector will also have a hard time in the future. Increased regulations mean more demand, which translates to even higher costs. FinTechs especially will have more challenging operational guidelines moving forward. 

Only the already operating service providers are better off. They will be operating under the existing rules. 

The new regulations provide extensive conditions for virtual currency service providers. The first is to prepare a detailed white paper. The white paper should contain a detailed description of the service provider. It should also detail the participants and the project.

The new regulations also make it hard for anyone to start a crypto business in the EU. A crypto service provider in the EU must be a legal person with a registered office in a member state. They should also have authorization under article 55 of MiCA regulations

The person offering the services must also get authorization from a competent authority. The process should take around 25 days. This is different from now when anyone can start a crypto affiliate program.

The regulations also go further for the crypto exchanges. The new rules expect them to operate like traditional exchanges. 

The exchanges have to follow the requirements as banks and other financial institutions. They have to register with the competent authorities. This ensures the "know your customer checks." They also have to track all virtual transactions. After which they report suspicious activities to the government authorities. 

Service providers will also be under increased monitoring. There are systems in place to ensure compliance. They also have to keep records subject to auditing. 

Strict regulations are the best way to deal with illegal activities in virtual money. The lack of regulation has seen it become a conduit for money laundering. It is also used for human and drug trafficking. Some countries are again using the cryptos to avoid sanctions.

Once the startups adhere to the regulations, they can detect any anomalies. They will flag off all these illegal transactions. 

The Rise of the CBDCs

The rise of the crypto economy has also seen an emergence of state-backed cryptocurrencies. Instead of relying on Bitcoin, Ethereum, and others, the governments own their coins. That is why they are considering central bank-backed digital currencies (CBDCs).

The CBDCs would help the governments keep control of the economy. Instead of relying on private coins like the current ones. They will still determine supply and value. 

Even though a possibility, most countries are yet to launch the coins. That is why, for now, the regulations are slow on them. The proposals do not have extensive clauses on the CBDCs. 

Already, the EU is considering the possibility of having one by 2024. Only then will they provide for regulations. For now, only Bahamas has launched a successful state cryptocurrency. 

Bottom Line

From face value, the regulations seem to derail crypto growth. They seem to be blocking the main reasons for crypto popularity. Most users considered digital currencies for anonymity and decentralization.

Still, regulations are necessary. The more the cryptos grow, the more the risks to consumers. The sector is full of fraud and scams. That is scarier than only having to avoid a control authority. 

The main reason for the regulations is for consumer safety. Once the coins become mainstream, the consumers need peace of mind during usage. That is why it provides for extensive registration. Once complete, the sector would become safer and more certain. 

While the stablecoins and startups find it challenging, it is for the good of the economy. 

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