Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
Since cryptocurrencies became a thing, the same tune is on a repeat loop. Regulating them would drastically increase mainstream adoption, but regulations would also diminish some of their intrinsic properties as borderless, decentralized, anonymous payment alternatives. The European Commission is ready to reveal what would happen if proper regulation would finally take place.
Europe Leads the Way in Regulatory Compliance
As we have recently learned from the third Global Cryptocurrency Benchmarking Study, Europe holds by far the highest number of licensed crypto companies at 48%. North America, on the other hand, has just 20%. Likewise, Europe-based crypto companies spent most on compliance expenditures, at 13%.
This tells us that Europe is the most likely to bring forward regulatory models serving as role models for other continents. Considering that EURO is the world’s second most important currency, and the high level of FinTech innovation coming out of Europe, normalization moves cannot come sooner.
We already have a good idea that both the lack of comprehensive regulation and the lack of crypto insurance options, hampers greater penetration of crypto services. For a long time, governments feared cryptocurrency as a gateway to tax invasion, money laundering, and other illicit activities. This is why it is so important that the EU, as the world’s economic powerhouse, pioneers such comprehensive regulation.
The European Commission’s Proposal
As the executive body of the EU, the European Commission’s proposal is mainly concerned with regulating stablecoins. Currently, the one with the largest market value is Tether (USDT) at $15.5 billion. However, other stablecoins are in the works, such as Facebook’s Libra, which could easily be integrated into Facebook’s massive social media and instant messaging infrastructure.
Valdis Dombrovskis, serving as EVP of the European Commission, notes that this proposal aims to facilitate the inevitable transition into digital finance, instead of creating uncertainties and abuse by inaction.
Moreover, the ill-formed COVID-19 restrictions severely harmed the European economy and living standards. Valdis hopes that greater availability coming out of FinTech and crypto sectors would alleviate some of the EU’s bungling of the pandemic.
“An innovative digital single market for finance will benefit Europeans and will be key to Europe’s economic recovery by offering better financial products for consumers and opening up new funding channels for companies.”
The proposal would also encompass the publishing of white papers for all issued crypto-assets. The issuers of digital tokens would be subjected to Electronic Money Directive rulesets. Likewise, each EU member state would have to establish an authoritative body to aid supervision alongside the European Banking Authority.
The Implications of the Proposed EU Rules
The new rules would require trading platforms to have a physical presence in the EU. Unfortunately, this would make them subject to all the capital regulations as well. Additionally, all the major stablecoins would be scrutinized by the European Banking Authority, which is not exactly aligned with the spirit of decentralization!
Now, it is all up to the EU Parliament and EU member governments to iron out the details, which should be finalized by 2024. However, the effect of this proposal itself should be conducive for businesses that have cryptocurrency business models in their sights.
The benefits of a regulated cryptocurrency marketplace are all too familiar, despite any regulatory expenditures:
A more efficient way for businesses of raising funds by utilizing blockchain networks.
Low transaction fees.
More transparency in evaluating cryptocurrencies’ market value, which would spur more investors into action.
Reduced volatility due to more organic growth, thanks to increased transparency and greater institutional investor input.
More competitive financial products covering more demographic groups, many of which traditional banking institutions view as risky.
In the end, we are likely to see more hybrid financial systems. DeFi sector holds the greatest potential to materialize such projects, just as ArbiSmart managed to accomplish while also being EU-licensed.
What do you think about the EU’s proposed ruleset? Do you think regulated crypto will bring benefits that businesses will actually utilize? Let us know in the comments section below.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.