The European Commission has unveiled “ambitious” proposals to regulate crypto assets—and while it’s set to deliver legal clarity to exchanges and stablecoin issuers, the measures will bring tougher requirements for the sector.
Under the new rules, a fintech company that obtains a license to operate in one EU nation will be able to provide services in the trading bloc’s 26 other member states automatically. But it might be a little too early to crack open the champagne yet. The paper adds:
“At the same time, the proposal imposes more stringent requirements on ‘stablecoins’, which are more likely to grow quickly in scale and possibly result in higher levels of risk to investors, counterparties and the financial system.”
The European Commission is mainly worried about global projects like Facebook’s Libra—and as a result, the toughest measures will only be enforced for stablecoins with a total market capitalization of over $5.8 million. Projects that pass this threshold will need to be authorized by a “national competent authority” before they can operate.
Work to be done
It is worth noting that these measures won’t come into force overnight, and it may take several years before we see them in action. Teasing the announcement last week, the European Union said it would take four years to put these regulations in place.
Mattthieu Saint-Olive, a global CBDC expert at ConsenSys, expressed cautious optimism about the plans, and their potential to make cross-border payments quicker and cheaper. He said:
“It is exciting to see that the European Commission is taking the emergence of blockchain technology seriously,” he said in a statement. “There is still a lot of work to be done, especially when it comes to designing a regulation that fosters digital innovation and embraces the new opportunities this technology brings.” He added:
“Europe has the potential to be a leader in blockchain transformation.”
Protecting small businesses and start-ups
Elsewhere, it was announced that companies issuing crypto assets worth more than $1.7 million in a 12-month period will be obliged to publish a white paper with mandatory disclosure requirements.
Given the size of the crypto industry, and the number of digital currencies that exist, the European Commission said it is aiming to ensure “the requirements imposed on crypto asset service providers are proportionate to the risks created by the services provided.”
In the document, lawmakers say they are trying to avoid creating an administrative burden for small businesses by offering exemptions for assets with a smaller market cap.
Other measures include a new “sandbox” that will pave the way for experimentation by companies and institutions that want to try and settle transactions using crypto assets. The commission said this controlled environment allows some existing rules to be temporarily suspended so innovative products can be put through their paces—and allows regulators to determine where current measures fall short.
And last but not least, a retail payments strategy is set to make it easier for consumers to complete e-commerce transactions safely and conveniently. A “fully integrated retail payments system” is going to be created across the trading bloc, which will allow cross-border payments to be completed instantly.
Despite the European Commission’s enthusiasm to embrace digitization, it is clear that the organization’s main priority is protecting consumers and investors.
There are multiple considerations that the institution has had to take into account: ensuring the public has more choice in how they make digital payments, preventing stablecoins from putting financial stability at risk, avoiding a rise in money laundering and cyber-crime, and giving crypto-focused businesses the certainty they need to offer innovative products.
“The future of finance is digital,” said Valdis Dombrovskis, one of the commission’s executive vice presidents. “We saw during the lockdown how people were able to get access to financial services thanks to digital technologies such as online banking and fintech solutions. Technology has much more to offer consumers and businesses and we should embrace the digital transformation proactively, while mitigating any potential risks.”
Dombrovskis also expressed hope that creating a more digitized single market will help drive Europe’s economic recovery.
The raft of measures is separate to the continent’s exploration of its own central bank digital currency. Earlier this week, Christine Lagarde confirmed the European Central Bank is looking into “the benefits, risks and operational challenges” associated with launching a CBDC—and expressed hope that a digital euro would compete with private crypto assets.
The ECB took aim at stablecoins that could challenge a CBDC on Sept. 22, raising the specter of bank run-style panics. It said, “fragilities within the stablecoin arrangement itself, and its links to the financial system, may give rise to financial stability risks.”