Cryptocurrencies have been booming in recent years. And with them a multitude of projects and companies have arisen. This abundant ecosystem is still poorly regulated in the world. However, the European Union (EU) will give birth to a first regulatory framework, which can serve as an example for other countries. On October 10, the MiCA (Markets in Crypto-Assets) and TFR (Transfer of Funds Regulation) texts were finally approved by the European Parliament’s Committee on Economic and Monetary Affairs.
They must establish a set of rules within the European Union that brokers and platforms offering services related to crypto assets will have to comply with. A framework that will reassure savers and strengthen the security of their investments in this new class of assets, which are regularly targeted by scammers and hackers. The publication of TFR and MiCA in the Official Journal of the EU is planned for early 2023, before entry into force between 12 and 18 months later, i.e. not before 2024.
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Here are the main points to remember from these two texts, which still need to be accompanied by technical details on the operational implementation of certain measures.
Creation of an accreditation at European level
MiCA requires brokers and exchange platforms offering crypto assets to have CASP approval, acronym for “Crypto Asset Service Provider”, in order to operate within the Union. Thanks to this new status, brokers and platforms that have actually been approved can benefit from a European passport, which gives the possibility to offer and promote their services in the 27 Member States.
In France, PSAN registration and accreditation, for “digital asset service provider”, has already been implemented by the Pacte law of 2019. Today, more than fifty players are PSAN registered with the Financial Markets Authority (AMF), but none still has approval.
“However, the status of CASP at the European level is closer to approval than PSAN registration,” emphasizes Hugo Bordet, head of regulation at Adan, the crypto sector lobby in France. “Nevertheless, several approval requests should succeed in the coming months,” he confides.
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In addition to the implementation of an anti-money laundering and anti-terrorist financing system, which is already foreseen under the PSAN registration in France, the actors seeking CASP authorization will have a resilient and secure IT system must demonstrate, a clear pricing policy and customer information system, especially with regard to the risks associated with investing in crypto assets. They must also have sufficient capital.
Finally, the good reputation and experience of the leaders will be subject to scrutiny by financial regulators, as is already the case for brokers and platforms registered with PSAN. These are all points that should provide savers with more certainty and transparency.
Inquire about the environmental footprint of crypto assets
CASP players will also have to provide their clients with details about the environmental footprint of the various crypto assets. The Proof of Work ban was ultimately not retained in MiCA. This mechanism, closely linked to the mining process, is necessary for the validation of transactions for certain cryptocurrencies such as bitcoin. It also requires a large amount of electricity to operate.
The CASPs will have to explain its impact on the environment and probably the energy mix used, through clear and non-misleading information, accessible to the customer who wants to buy bitcoin. Regardless of the cryptocurrency, the same transparency is required. Information will have to be provided for each computer protocol, such as the labeling of washing machines about their energy consumption.
The problem is that there is no established consensus on the footprint of the various cryptocurrencies, starting with the first, bitcoin. “There is a lot of data about bitcoin, but not yet sufficiently accurate,” Hugo Bordet underlines, when not questioned. And for other proof-of-work blockchains, on which cryptocurrencies such as the Litecoin and Dogecoin, data could be missing, not to mention even more confidential digital tokens.
Therefore, details are still awaited from the European Commission, which will present a report on the environmental footprint of crypto assets to the European Parliament and the Council of the EU in a few months.
Exchange of platform customer information for each transaction
As part of a cryptocurrency transaction, future CASPs must share information about both the sender and beneficiary of the crypto asset transfer. A measure that is foreseen in the TFR text for the time being and is intended to better combat money laundering and the financing of terrorism.
The information exchanged between two CASPs involved in a transaction includes:
- for the client’s CASP: the name and first name of this client, the address of his electronic wallet, his client account number, his postal address, his passport number or his identity card;
- for the CASP of the beneficiary of the transaction: the beneficiary’s first and last name, the address of his wallet, his account number. The address and proof of identity of the customer are therefore not communicated here.
In case of violations, the CASPs will have to report to the authorities, in this case the Tracfin intelligence service in France.
This rule also applies to “traditional” bank transfers, but only for transactions of at least €1,000, when no threshold has been set for crypto assets. “So there is more bureaucracy for players in the crypto sector, which leads to compliance costs,” says Hugo Bordet.
In addition, if a transaction is made on a platform that does not guarantee compliance with European data protection law (GDPR), the broker or client’s platform may refuse to share information or even block the cryptocurrency transfer. A first, which has yet to be confirmed and clarified by the European authorities.
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Self-hosted wallet owners identity verification
With regard to peer-to-peer transactions, from electronic wallets to others directly owned by the owners of crypto assets (“self-hosted wallets”, such as those of the Ledger brand), they are not subject to to no transfer of information or controls.
On the other hand, when there is an intermediary involved, be it the originator or the beneficiary of the transaction, the broker or the platform involved must systematically check various details regarding the holders of the self-hosted wallet (or private ), if the amount of the transaction is greater than 1,000 euros.
For example, if a cryptocurrency transaction order for an amount of 1,001 euros is issued by a broker to a private wallet, the identity of the holder of this wallet will be requested by the broker. The modalities for the concrete application of this measure have yet to be determined. Today, a self-hosted wallet can be created without having to provide an identity or address. Thus, this new rule would imply that personal information must be disclosed to an intermediary.
European players fear ‘reverse recruitment’
In addition, the MiCA text does not provide for the prohibition of “reverse recruitment”, which could be translated as a form of passive marketing. Foreign players not registered in the European Union are not allowed to acquire customers or promote their products on the continent. On the other hand, European savers can contact them directly, without a first request on their part.
In this case, no prohibition is foreseen. For example, a French or Portuguese investor can buy cryptocurrencies and subscribe to online services of the American platform Kraken, which is not regulated in Europe.
This reverse request “opens a breach in favor of non-compliant foreign players,” argues Adan, who sees an asymmetry with the obligations imposed on future European CASPs.
DeFi and NFT excluded from MiCA, but no stablecoins
MiCA does not regulate everything about crypto assets. Decentralized finance (DeFi), which refers to all financial applications developed on blockchain technology, is excluded from this text. It should later be the subject of a report by the European Commission to determine the axes of regulation.
Similarly, non-replaceable tokens, better known by their acronym NFT, generally remain excluded from the MiCA regulation. But legal uncertainty remains about large collections or series of NFTs, which could potentially fall under this text.
Finally, the issuance by European players of new stablecoins, these cryptocurrencies backed by the price of a currency such as the dollar or the euro, will be highly controlled. And the creation of a stable euro currency could be rejected by the European Central Bank, which is experimenting with its own electronic money and wants to maintain some control over these types of assets in order to remain sovereign.
As for algorithmic stablecoins, which are more complex and often decentralized, they have been overtaken by MiCA. They will not benefit from the exemptions granted to DeFi. CASP platforms and brokers are prohibited from providing interest for services related to stablecoins, whether algorithmic or not. However, cryptocurrency lending services (loans) are not covered by this measure and are explicitly authorized by MiCA.
The weak guarantees offered by certain algorithmic stablecoins such as Terra, whose price collapsed completely in the spring, prompted European institutions to legislate. While much remains to be done to regulate crypto assets, their use and industry players, European savers should benefit from a more reassuring and secure framework thanks to TFR and MiCA regulations.
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