What the EU crypto regulations mean for businesses

Written by Gabriel Hopkins, Chief Product Officer at Ripjar

 

For the first time, the EU has proposed regulations for cryptocurrency providers to protect investors, consumers, and the market itself, while ensuring fair competition and financial stability. By putting in place a legal framework, the EU hopes to guarantee compliance across all member states. The new regulations also aim to remove the anonymity of these assets which have been used extensively by criminals and sanctioned individuals to hide their wealth.

With the market capitalisation of cryptocurrencies reaching $1.7 trillion in March 2022, it is essential that  digital currencies are well regulated. The steep market declines since March underling the point. Those declines have led to more than 3,000 people working in cryptocurrency being laid off, including 1,180 staff at Coinbase or 18% of their workforce.

As the cryptocurrency market is currently largely  unregulated, this creates unnecessary levels of risk and causes instability. Therefore, the new proposed EU regulations can lead to better practices and more trust within the market. And the regulations will be implemented at EU level, across all member states which is a marked improvement to the current EU system, in which some countries have regulated cryptocurrencies and others do not.

Gabriel Hopkins

How will the regulations work?

With any new regulations coming into practice, it is imperative that organisations have a base level knowledge and an understanding of the requirements. These proposed EU regulations are split into two categories: Markets in Crypto Assets (MiCA) and Transfer of Funds Regulation (TFR). Some considerations for both of these categories include:

– They are focused on regulating unbacked crypto assets and is designed to prevent crypto crashes, such as the high-profile TerraUSD crash which cost the market $200 billion in a single day. According to MiCA, cryptocurrency issuers must maintain a sufficient liquid reserve to honour redemption requests meaning that fluctuations in value are limited. Plus, to operate in a given country, issuers must obtain permission from a national financial authority.

Across the EU, the European Banking Authority will create and maintain a register of non-compliant users. This list will reduce criminal activity through cryptocurrency and also put a stop to repeat offenders across EU borders.

– They are designed to combat anonymity risks through increased Know Your Customer (KYC) Regulations which are implemented to determine the customer’s identity and allows institutions to assess the customer’s risk profile. The goal of TFR is anti-money laundering and counter-financing of terrorism.

This regulation is in line with the ‘Travel Rule’ from the Financial Action Task Force which requires financial services providers to trace cross-border transfers which are often used by international criminals as a way of sending money internationally to fund terrorism or other illegal activity.

TFR also requires the personal data of all parties to be recorded, no matter the size of the transfer. . If the personal details of any party are requested by the authorities, cryptocurrency platforms must provide these details. Before releasing assets, it is the responsibility of the platform to ensure that the beneficiary has not been subject to sanctions. These regulations currently only apply to cryptocurrency stored on platforms rather than held by an individual.

Why are the regulations necessary?

Because cryptocurrencies and crypto assets are not issued by a bank or central authority, businesses and financial services organisations now must play a part in ensuring that these assets are handled responsibly and cannot in any way be used to support crime or fraudulent activity. In order to comply with these new regulations, businesses handling cryptocurrency must implement systems to record and monitor all parties involved in transactions. This means that cryptocurrency platforms are now also responsible for storing and managing consumer data which is highly regulated.

In the longer term, this will allow cryptocurrency to be adopted more widely and will promote consumer trust and stability of the market. However, in order to be ahead of the curve with this regulation, businesses must look to proactive solutions to protect their reputation and that of customers from future harm.

Regional considerations

Although Brexit separated the UK from the EU in 2020, so far cryptocurrency regulation between the two has been similar. Currently there are some indications that UK regulation could even become more stringent than that of Europe, which is something that any organisations with dealings in the UK will have to be mindful of. For example, in 2022, the UK Treasury tightened regulations for cryptocurrency advertising to bring it in line with other forms of financial asset promotion, highlighting a shift in government attitude as cryptocurrency comes into the mainstream.

How do financial services companies implement this?

Following the implementation of the new regulations, financial services organisations handling or transacting cryptocurrencies will have a higher level of responsibility when it comes to storing data and remaining compliant within regulatory body guidelines. In order to ensure best practice, compliance teams must be proactive and highly organised in order to respond to the changes. As a consequence, teams are increasingly looking to data driven solutions which are largely automated. They want to remove the risk of human error and also save IT teams the hassle of trawling through massive amounts of data. It is crucial that businesses use the tools available to them in order to be as efficient and watertight in their practices as possible.

 

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