The EU has moved to rein in the “wild west” of crypto assets by agreeing a groundbreaking set of rules for the sector, adding to pressure on the UK and US to introduce their own curbs.
Representatives from the European parliament and EU states inked an agreement late on Thursday that contains measures to guard against market abuse and manipulation, as well as requiring that crypto firms provide details of the environmental impact of their assets.
“Today, we put order in the wild west of crypto assets and set clear rules for a harmonised market,” said Stefan Berger, the German MEP who led negotiations on behalf of the parliament.
Referring to the recent slump in cryptocurrency prices – the total value of the market has fallen from $3tn (£2.5tn) last year to less than $900bn – Berger added: “The recent fall in the value of digital currencies shows us how highly risky and speculative they are and that it is fundamental to act.”
The markets in crypto assets (MiCA) law is expected to come into force at about the end of 2023. Globally, crypto assets are largely unregulated, with national operators in the EU required only to show controls for combating money laundering.
Cryptocurrency is the term for a group of digital assets that share the same underlying structure as bitcoin: a publicly available “blockchain” that records ownership without having any central authority in control.
The sector’s supporters have said it represents a good investment because, for instance, it carries low fees and, unlike conventional currencies, is not tied to governments. Nevertheless, its detractors say a lack of regulatory oversight or implicit government support, because of crypto and bitcoin’s independent origins, make it susceptible to scams and wild fluctuations in price.
MiCA will be the first comprehensive regime for crypto assets in the world and will contain strong measures to guard against market abuse and manipulation, Ernest Urtasun, a Green party MEP, said.
The new law gives issuers of crypto assets and providers of related services a “passport” to serve clients across the EU from a single base, while meeting capital and consumer protection rules. Non-fungible tokens (NFTs), a $40bn market last year, are not covered by MiCA.
The EU negotiations on Thursday also focused on issues such as supervision and energy consumption of crypto assets. “We have agreed that crypto asset providers should in future disclose the energy consumption and environmental impact of assets,” Berger said.
The UK and US, two significant crypto centres, have yet to approve similar rules, although regulators in both countries have warned of the need for stronger safeguards in the sector.
The MiCA law is expected to set a benchmark for other regulatory regimes for crypto globally, although one expert said the all-encompassing nature of the EU regime might not be replicated.
Harry Eddis, the global co-head of fintech at Linklaters, a London-based law firm, said the EU had “nailed its crypto colours to the mast” with the law.
“Other jurisdictions have shown little appetite to date in following their lead in implementing such an all-encompassing regulation, although we can surely expect to see other financial services centres upping their game in regulating the crypto community, albeit in a more piecemeal fashion.”
A stablecoin, like the name suggests, is a type of cryptocurrency that is supposed to have a stable value, such as US$1 per token. How they achieve that varies: the largest, such as tether and USD Coin, are effectively banks. They hold large reserves in cash, liquid assets, and other investments, and simply use those reserves to maintain a stable price.
Others, known as "algorithmic stablecoins", attempt to do the same thing but without any reserves. They have been criticised as effectively being backed by Ponzi schemes, since they require continuous inflows of cash to ensure they don't collapse.
Stablecoins are an important part of the cryptocurrency ecosystem. They provide a safer place for investors to store capital without going through the hassle of cashing out entirely, and allow assets to be denominated in conventional currency, rather than other extremely volatile tokens.
In the UK, the financial watchdog is weighing proposals on marketing crypto products to consumers that could lead to significant restrictions on crypto exchanges operating in the country.
In May, the Treasury declared it wants a regime in place for dealing the collapse of a stablecoin, a cryptocurrency that is backed by traditional assets such as short-term debt and therefore could pose a risk to the wider financial system.
Crypto assets came under pressure after the collapse of the TerraUSD stablecoin project in May, with the major US cryptocurrency lending company Celsius Network freezing withdrawals and transfers. However, the sector has also proven susceptible to wider economic factors.
These include stock market declines linked to rising inflation and ensuing increases in interest by central banks. Raising rates – a path taken by the US, UK and Swiss central banks last month – can make risky assets less attractive.
For instance, certain tech stocks, whose price can be based on expectations of strong future earnings over many decades, can be less appealing than the fixed returns on offer immediately from investments such as bonds, which become more attractive in a higher lending rate environment.
The regulatory breakthrough came as India’s central bank said cryptocurrencies were based on “make believe”. The bank’s latest financial stability report said cryptocurrencies were no more than “sophisticated speculation”.
The bank’s governor, Shaktikanta Das, wrote: “Cryptocurrencies are a clear danger. Anything that derives value based on make believe, without any underlying [value], is just speculation under a sophisticated name.”