The year 2023 will go down in history as a tumultuous time for crypto investors. Although the market has seen difficult times, such as the contraction in the overall market capitalization of cryptocurrencies, the depreciation of ether, and the decline in the total value invested in decentralized finance (DeFi), it has also witnessed notable progress. These advancements include continued institutional adoption, growing interest in Layer 2 solutions, and, most importantly, major changes in cryptocurrency regulation. It is precisely this last aspect that we will explore in this article. What have been the recent developments in the regulation of cryptocurrencies within the EU and globally? Let’s make a point.
Adoption of MiCA regulations in the European crypto space
Adopted in June 2023, the MiCA law (Regulation on Markets in Crypto-Assets) is the first European regulatory framework relating to cryptocurrencies. Applicable directly to market players without the need to transpose it at national level, it takes precedence over the legislation of the Member States.
The MiCA law provided regimes for three entities. These are issuers of stablecoins, issuers of cryptocurrencies other than stablecoins (ether and bitcoin for example) and crypto service providers.
The MiCA law requires issuers to publish a detailed white paper with notification to regulators. As for crypto service providers, it requires them to obtain a license and have a headquarters in Europe.
This obligation applies to both European crypto companies and non-European crypto companies operating for EU clients. Although its implementation will be gradual from June 30, 2024, subsequent revisions and updates should be expected. The MiCA law, in fact, failed to provide details on certain crypto activities, such as the lending of cryptocurrencies for example.
Law on traceability of cryptocurrency transfers in the EU
At the same time as the MiCA law, the European Council adopted a revision of the 2015 funds transfer regulation. This revised version, which complements the MiCA law, provides that transfers of cryptocurrency be traced in the same way as transfers of fiat. It also strengthens consumer protection against financial crime and market manipulation.
The regulation introduces two obligations for crypto service providers. They must collect and make accessible all information relating to the originators and beneficiaries of the crypto transfers they carry out, whatever the amount.
The law also specifies the various information that crypto service providers must obtain from their customers before carrying out crypto transfers. Finally, the largest crypto service providers are expected to publish a public report on their energy consumption. The goal is to reduce the ecological impact of cryptocurrencies. Like the MiCA law, this law will also come into force gradually from 2024.
The Directive on Administrative Cooperation (DCA8) in the EU
In 2023, the EU’s ambition to regulate the crypto sector was not limited to the MiCA law and the revision of the law on funds transfers. On September 13, 2023, the European Parliament adopted the DAC8 directive, which marks a turning point in European crypto regulation.
Indeed, as an addition to existing crypto regulations, it imposes on crypto service providers a requirement for exhaustive declaration of crypto transactions to the tax authorities. Tax services will be able to automatically exchange this information with each other. Even if these laws appear to be a threat to the adoption of cryptocurrencies, they give the EU a considerable head start over the USA.
Regulatory advances in the United Kingdom
If MiCA facilitates crypto activity in the EU, the United Kingdom did not want to be completely left behind. In June 2023, the country enacted a Financial Services and Markets Act (FSMA). This replaces legacy EU legislation and introduces new chapters on crypto assets.
According to the schedule, it is expected that it will soon be extended to crypto exchanges, crypto mining and other crypto activities. This regulatory initiative demonstrates the British government’s desire to confer legitimacy on cryptocurrencies and provide a favorable framework for their development in the country.
The USA still lagging behind on the issue of crypto regulation?
On the USA side, 2023 was marked by the recognition of stablecoins as a form of currency. Whatever anyone says, this is a significant step forward for the American crypto ecosystem in general.
However, to date, in the United States, there is no legal document stating when a cryptocurrency can be considered a security. Thus, crypto exchanges regularly undergo severe attacks from regulators (SEC and CFTC) who try to regulate through sanctions.
Fortunately, the SEC is starting to suffer defeats in the courts which, more recently, seem to be deliberating in favor of cryptocurrencies. In June, Republicans had to propose a bill on the delimitation of powers between the SEC and the CFTC.
The lack of regulatory clarity around cryptocurrencies also encourages the misuse of cryptocurrencies, often condemned by the media and anti-crypto politicians. On October 19, 2023, for example, the Financial Crimes Enforcement Network (FinCen), a division of the US Treasury, proposed legislation targeting crypto mixers.
FinCen has proposed imposing recordkeeping and transaction reporting requirements on crypto mixers to preserve national security. She explained that this measure was necessary to fight, among other things, against the use of cryptocurrencies to finance terrorist organizations.
The initiative originates from recent rumors of the use of cryptocurrencies in financing the Hamas terrorist attack against Israel. It also appears to have similarities with the Money Transfer Act and DCA8, all adopted this year in Europe.
Clearly, the USA is seriously behind in the development of clear and precise crypto regulations. This affects the viability of crypto exchanges and limits innovation in the sector. For a country considered the global hub of crypto and Web3 innovation, the US still has a long way to go. We hope that the country resolves this issue in 2024 so as not to prevent innovation.
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