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The European Parliament has endorsed the first EU rules to trace crypto-asset transfers in world-leading legislation passed last week for the 27-member bloc.
The new framework is designed to prevent money laundering as well as introduce common rules on supervision and customer protection.
Digital assets have long been seen as a ‘wild west’ landscape, but investing in crypto could now be reformed quicker than previously anticipated.
Likewise, crypto asset regulations are beginning to firm up in the United Kingdom, which means investment teams at insurance firms could see changes to allocation strategy sooner than initially expected as new opportunities arise.
The legislation’s speedier uptake was believed to be spurred on by the recent failing of FTX.
On Thursday, MEPs voted 529 to 29 in favour – with 14 abstentions – of the first piece of EU legislation for tracing transfers of crypto-assets like bitcoins and electronic money tokens.
“The so-called “travel rule”, already used in traditional finance, will in
future cover transfers of crypto assets."
The text, which was provisionally agreed by Parliament and Council negotiators in June 2022, aimed to ensure that crypto transfers can be traced and suspicious transactions blocked – as is the case with any other financial operation.
“The so-called 'travel rule', already used in traditional finance, will in future cover transfers of crypto assets. Information on the source of the asset and its beneficiary will have to 'travel' with the transaction and be stored on both sides of the transfer,” said the European Parliament’s statement on the passage.
The law also covers all transactions above €1000 from so-called self-hosted wallets (a crypto-asset wallet address of a private user) when they interact with hosted wallets managed by crypto-assets service providers. The rules do not apply to person-to-person transfers conducted without a provider or among providers acting on their behalf.
“This puts the EU at the forefront of the token economy; the
sector damaged by the FTX collapse can regain trust."
Plenary also gave its final green light to new common rules on the supervision, consumer protection, and environmental safeguards of crypto-assets – including the crypto-currencies Markets in Crypto-assets (MiCA) law – with 517 votes in favour, 38 against, and 18 abstentions. The draft law agreed informally with the Council in June 2022 includes safeguards against market manipulation and financial crime.
“This puts the EU at the forefront of the token economy with 10,000 different crypto assets; consumers will be protected against deception and fraud, and the sector that was damaged by the FTX collapse can regain trust. Consumers will have all the information they need and all underlying risks around crypto-assets will have to be monitored,” said Stefan Berger, a German MEP for the Christian Democratic Union and lead MEP for the MiCA regulation.
“We secured that the environmental impact disclosure will be taken into account by investors in crypto assets. This regulation brings a competitive advantage for the EU. The European crypto-asset industry has regulatory clarity that does not exist in countries like the US,” he added.
MiCA will cover crypto-assets that are not regulated by existing financial services legislation. Key provisions for those issuing and trading crypto-assets (including asset-reference tokens and e-money tokens) cover transparency, disclosure, authorisation, and supervision of transactions. Consumers would be better informed about the risks, costs and charges linked to their operations. In addition, the new legal framework will support market integrity and financial stability by regulating public offers of crypto-assets.
The EU’s rapid move has been largely welcomed and puts other major crypto financial hubs, namely the UK and the US, in the hot seat when it comes to passing concrete laws.
In early 2023, there was an announcement from the UK’s HM Treasury that plans were in development to regulate crypto, provide clarity to businesses, and protect consumers. These plans, said the announcement, were “ambitious” and would “grow the economy by robustly regulations crypto asset activities.”
UK Economic Secretary to the Treasury, Andrew Griffith said that robust, transparent, and fair standards were necessary – and already in the regulatory pipeline. “We remain steadfast in our commitment to enable technological change and innovation – and this includes crypto asset technology,” he said.
This regulation will apply to a wide variety of crypto asset activities and will mimic the Treasury’s approach to traditional finance. An emphasis will be placed on clear definition, disclosure, and content requirements for trading admission. The rules around financial intermediaries and custodians will also be strengthened.
In the US, the picture remained similar with a pipeline of legislation. In September 2022, the White House announced new reports to outline recommendations to protect investors, businesses, financial stability, and the environment around crypto following an executive order.
“To counter money-laundering risks ESMA should set up a register for non-compliant crypto assets service providers that operate without authorisation."
President Biden’s March 9 executive order on Ensuring Responsible Development of Digital Assets outlined the first whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.
Others have warned that the slow-moving pace of US federal legislation on the topic risks seeing the industry move to less regulated areas.
The European Parliament’s agreed text included measures against market manipulation and to prevent money laundering, terrorist financing, and other criminal activities. “To counter money-laundering risks, the European Securities and Markets Authority (ESMA) should set up a public register for non-compliant crypto assets service providers that operate in the European Union without authorisation,” it said.
There were also stipulations around the reduction of the high carbon footprint of crypto-currencies, and significant service providers will have to disclose their energy consumption.
The texts will now have to be formally endorsed by Council before publication in the EU Official Journal and will enter into force 20 days later.
