New Crypto Regulations in Europe

The EU has agreed to a new set of regulations that will help control cryptocurrencies.

What are the new rules?

The markets in crypto assets (MiCA) law will protect the market against manipulation and abuse. It will mandate that crypto service providers receive approval to offer services across the EU from a national authority. It also requires digital currency firms to be transparent about the impact their assets have on the environment.

Lawmakers argued this was a necessary change considering cryptocurrency’s recent drop in value. Last year, the market was at £2.5 trillion. Now, it has fallen to less than £756.7 billion. The German MEP Stefan Berger said this proves just how high-risk they are.

Supporters of crypto say the sector has good investment potential. There are low fees, and the assets are not bound by government oversight. However, critics say that this is exactly what makes cryptocurrency so vulnerable to scams and volatile prices.

The legislation will likely come into effect by the end of next year. It will be the first comprehensive legislation on crypto assets in the world. Crypto assets have notoriously been widely unregulated. Prior to this law, operators within the EU have only been required to show how they combat money laundering.

Under the new law, firms who issue cryptocurrencies and/or provide related services will be allowed to have clients across the EU while working from a singular base. NFTs will not be covered by MiCA. 

How are firms reacting?

This move from the EU came during a time of turmoil as crypto broker Voyager Digital announced it was suspending deposits to, withdrawals from, and trading via its platform. Customers of Voyager were worried, as the company has loaned $1.1 billion in crypto assets, but the crypto assets they hold are valued at just $685 million. The CEO claimed the move would allow the firm to explore “strategic alternatives with various interested parties.”

Europe’s all-encompassing MiCA law will likely act as a benchmark for other regimes throughout the rest of the world. While large crypto hubs like the US and UK have not yet implemented regimes, many financial firms recognise the need for improved safeguards. It is likely that they will soon begin prioritising crypto regulation.

Since the regime was announced, crypto exchanges have been working to secure registration across Europe. Some of the world’s top providers like Binance and Coinbase have already obtained registration in countries like France and Italy. (Two employees of Coinbase as well as one former employee were recently prosecuted in the US for alleged insider trading.)

Registration is not all these exchanges will need in order to obtain full licences to operate throughout the EU as a regulated financial entity. However, the fact that they are rushing to lock down European bases exhibits how determined they are to enter the European market before MiCA comes into effect.

These crypto companies are not the only party who will benefit from such a move. National regulators are largely welcoming exchanges into their countries. This is presumably because crypto firms provide great opportunities for employment.

Crypto value, the climate, and ESG

Even though the market has been significantly impacted by rising interest rates and inflation, many investors are still betting on crypto. However, these investors are realising that there may be some cause for alarm. Bitcoin proponent Elon Musk said in March that Tesla would accept crypto payments. The company has since sold 75% of its Bitcoin holdings to convert them into traditional currencies, alarming investors.

While Ether and Bitcoin have both faced steep falls in price this year, the former is rallying much better than its competitor. This month, Ether is up 58% while Bitcoin is up just 23%. Crypto customers are becoming more aware of Bitcoin’s carbon footprint, which is perhaps why many are making the switch to Ether. Ether is hosted by the crypto platform Ethereum. Ethereum will soon move to a “proof-of-work” blockchain which requires much less energy than its previous mining methods. 

With the passing of MiCA, it will be interesting to see how this new legislation will affect not only Europe’s crypto sector, but also traditional markets. One outcome may be the emergence of new climate conscious opportunities. If Ethereum is successful in their move towards sustainability, more crypto firms will likely take on greener measures. What will this mean for ESG?

If you are interested in learning how you can incorporate ESG into your portfolio, schedule a free consultation with a Wealth Manager today.

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