The EU has agreed to new rules aimed at reining in the ‘wild west’ of crypto assets.

Expected to come into force in 2024, the Markets in Crypto Assets (MiCA) aims to protect investors against abuse and manipulation.

Among the rules will be laws to provide parties issuing cryptocurrencies with licences, allowing them to serve customers across the EU while showing they meet consumer and capital protection requirements.

Furthermore, the new legislation will require crypto asset providers to disclose the energy consumption and environmental impact of their assets.

Stablecoins, cryptocurrencies backed by existing assets, such as fiat currencies, are also going to be regulated. They will need to maintain ample reserves in order to protect holders should they be faced with mass withdrawal requests.

Any stablecoins that get too large could be also having their transaction volumes limited to 200 million euros per day.

However, proposals to ban cryptomining, where new tokens are produced in an energy-intensive process, were previously voted down by lawmakers.

In addition, Bitcoin, along with other decentralised crypto assets that don’t have issuers, will not be affected by the new EU rules. Trading platforms will be required to warn consumers of the risks associated with buying them.

NFTs are not covered by the new regime. Instead, the EU Commission is investigated whether they will need their own regulations, with a decision due within 18 months.

Hard Times for Crypto Assets

Cryptocurrencies are going through a rough time currently. Bitcoin is experiencing its worst quarter in a decade, having lost around 58% of its value in the past three months. Ether is on track for its worst quarter of all time, having lost close to 70% of its value.

These loses bring casualties. Linked cryptocurrencies Terra and Luna collapsed in May, wiping out billions of dollars in value, leaving the cryptoverse reeling. Crypto hedge fund Three Arrows Capital faces liquidation as it struggles to deal with plummeting cryptocurrency values.

On top of this, data last month revealed around 60% of UK crypto investors had taken out loans to buy their assets.

With cryptocurrencies still an unregulated market, those facing losses from the current bear market have few to no protections, leaving them with no choice but to accept their losses.

“Today, we put order in the Wild West of crypto assets and set clear rules for a harmonised market that will provide legal certainty for crypto asset issuers, guarantee equal rights for service providers and ensure high standards for consumers and investors,” said Stefan Berger, who led negotiations on behalf of the European Parliament.

Crypto Rules for Money Laundering

In addition to the MiCA, the EU also revealed new rules to identify and trace transfers of crypto assets to stop money laundering and prevent the tokens being used to finance crime or terrorism.

To do so, the legislation will extend the ‘travel rule’, which currently covers traditional finance, to cover crypto assets.

Under this, information on the source of the asset and its beneficiary must travel with the transaction and is stored on both sides of the transfer.

As such, crypto asset service providers will be obliged to provide this information to competent authorities if an investigation is conducted into money laundering and terrorist financing.

In addition, there will be no minimum thresholds nor exemptions for low-value transfers, as originally proposed.

However, to ensure that personal data is protected, if there is no guarantee that privacy is upheld by the receiving end, such data should not be sent.

Furthermore, crypto providers will have to verify that the source of the asset is not subject to restrictive measures or sanctions before making it available to the receiver, and that there are no risks of money laundering or terrorism financing.

And should a customer send or receive over 1,000 euros to or from an un-hosted wallet (one that is custody of a private user) the provider will need to verify whether the un-hosted wallet is effectively owned or controlled by this customer.

Recommended

• Leader Insights | How can Scottish SMEs scale?
• Post Office Horizon: New compensation package revealed
• Can we let the benefits of a substantial UK 5G Rollout pass us by?

The use of cryptocurrencies in money laundering has long been controversial. Research warned that criminals carried out around $8.6bn (£6.4bn) worth of cryptocurrency laundering in 2021, a 30% increase on the previous year.

Concerns around money laundering were widely seen as one of the reasons that major crypto exchange Binance was banned from operating in the UK by the Financial Conduct Authority (FCA) last year.

Ernest Urtasun, speaking on behalf of the Committee on Economic and Monetary Affairs (ECON), said: “This new regulation strengthens the European framework to fight money-laundering, reduces the risks of fraud and makes crypto asset transactions more secure.

“The EU travel rule will ensure that CASPs can prevent and detect sanctioned addresses and that transfers of crypto assets are fully traceable.

“This regulation introduces one of the most ambitious travel rules for transfers of crypto assets in the world. We hope other jurisdictions will follow the ambitious and rigorous approach the co-legislators agreed today.”

The legislation forms part of the new EU anti-money laundering package and will be aligned with the MiCA rules.

Get the latest news from DIGIT direct to your inbox

Our newsletter covers the latest technology and IT news from Scotland and beyond, as well as in-depth features and exclusive interviews with leading figures and rising stars.

To subscribe, click here.