In September 2020 the European Commission published a draft regulation on crypto-asset markets [Markets in Crypto-Assets Regulation, MiCA]. The document marked the first step toward harmonising cryptocurrency law across the EU.
Since then MiCA has been under discussion. The European Commission is taking feedback from EU regulators and representatives of the crypto industry.
Vadim Kurilovich, founder of the crypto exchange STEX discusses the draft and analyses trends in EU crypto regulation.
About STEX
STEX is a spot crypto exchange with support for Bitcoin, Ethereum, USDC and over 400 assets. Users can buy cryptocurrencies using Visa and MasterCard, as well as SEPA, Bancontact and iDEAL.
The platform operates under the license of the Estonian regulator and follows the KYC/AML procedures. Verification of customers is conducted by Cryptonomica and Fractal. The latter allows identity verification with documents that do not use Latin characters.
In February 2021 the exchange joined the blockchain and virtual currencies working group, which advises the European Commission on MiCA. In addition to STEX, it includes Chainalysis, LocalBitcoins and 18 other companies.
Regulation of cryptocurrencies in the European Union: from 5AMLD to MiCA
On 10 January 2020 the EU’s Fifth Anti-Money Laundering Directive (5AMLD) came into force. The document introduced definitions of virtual currency and providers of virtual asset services [virtual asset service providers, VASP].
Under 5AMLD, crypto companies must comply with AML/CFT requirements. The directive requires registration of crypto services with financial regulators in EU member states. Such companies must:
- implement Know Your Customer procedures [Know Your Customer, KYC];
- submit reports of suspicious activity [Suspicious Activity Reporting, SAR];
- on request provide information about users to the Financial Intelligence Unit [FIU].
In September 2020 the European Commission presented the legal framework for innovative solutions in the EU financial sector [Digital Finance Package]. The package included the Markets in Crypto-Assets Regulation (MiCA), which describes the rules for regulating virtual assets and crypto-asset service providers [crypto-asset service providers, CASP].
The aim of MiCA is «to protect consumers and ensure market integrity». The European Parliament and the Council of the European Union are examining MiCA together with an additional proposal to create a sandbox for blockchain projects.
The wording of MiCA can change depending on comments from financial regulators. Six months after the document’s publication the European Central Bank published an opinion on MiCA and stated the need for strict supervision of stablecoin issuers.
The European Commission solicits MiCA feedback from representatives of the crypto industry. One of the Commission’s advisers on MiCA is the Blockchain and Virtual Currencies Working Group (BVC WG). In February 2021 the cryptocurrency exchange STEX joined it.
“BVC WG is an association of the most experienced and reliable crypto businesses in the European Union. Participation in it has become an opportunity to convey to lawmakers the importance of their role in protecting users and businesses in the crypto market. It is important to shield consumers from “market participants” who buy one-day companies, promise gold mountains and “shave” users. They disappear quickly, so tomorrow a brand with a different name on a neighbouring island emerges. They must be isolated from the civilized world,” — commented Vadim Kurilovich, founder of STEX.
The European Commission plans to gradually integrate MiCA into the legislation of EU member states by 2024. In the meantime, they are shaping regulation within national laws.
Estonian crypto-regulation features
In 2017 Estonia passed a law on counter-terrorism financing and the legalization of proceeds of crime. It created the legal basis for running crypto business in the country. By 2020 authorities had issued 1,400 licenses for crypto business.
In July 2020 Estonian regulators tightened the rules for registering crypto companies — raised the state fee and required physical presence of offices and staff in Estonia.
More than 1,000 companies could not meet the new requirements and lost their licenses.
“There is currently no perfect jurisdiction for crypto business. But Estonian authorities consult and talk with industry representatives. This differs from countries where regulator is present for show. The tightening of requirements in 2020 cleansed the market and eliminated dormant companies. The process was not painless, but a living business continued to operate in the country,” — noted Vadim Kurilovych.
He is convinced that regulation is necessary to protect users of crypto exchanges:
“Regulation is, first and foremost, about protecting customers. STEX has taken a pro-compliant stance since its inception. We do not merely comply with all regulator requirements, but also actively engage with the Estonian financial intelligence division for detailed explanations of market specifics.”
In 2021 the number of STEX clients exceeded 300,000. At the same time, after changes in Estonia’s law, the European user base grew by 250%.
“The majority of new clients are residents of the Netherlands, Belgium, Austria and Germany. This shows that we are trusted by residents of developed European countries. We are proud to have kept the license after regulators tightened requirements in Estonia,” adds the founder of STEX.
Vadim Kurilovich notes that meeting regulatory requirements and the exchange’s reputation helped STEX join the BVC WG for consultations with the EC on MiCA.
Regulated crypto exchanges: pros and cons
In November 2020 macro-investor Raoul Pal stated, that mass adoption of cryptocurrencies is not possible without regulation. His statement triggered a wave of criticism on Twitter.
Founder of SatoshiLabs Alena Vranova noted that KYC poses a danger to bitcoin holders. Human Rights Foundation Director of Strategic Issues Alex Gladstein wrote that bitcoin is about privacy and freedom, not institutional adoption.
Nevertheless, lack of regulation is associated with a number of risks for users. They could lose money in a hack, buy “dirty” coins and become victims of personal data theft.
“It would be incorrect to claim that all unregulated exchanges intend to defraud their users. Nevertheless, having a licence and regulatory status is the only insurance for the user,” — commented Vadim Kurilovich.
According to CipherTrace, in 2020 losses from crypto scams and hacks amounted to about $1.9 billion. Of these, $129 million were attributed to unregulated DeFi protocols.
Regulated exchanges bear legal responsibility to users. STEX processes user information in accordance with the EU’s General Data Protection Regulation (GDPR) and stores assets in line with the license to provide virtual currency trading services.
Analytical firm Chainalysis notes a decline in the share of transactions linked to crime. The share was 2.1% in 2019 and 0.34% in 2020. However users can still receive a “dirty” cryptocurrency. To prevent such cases regulated exchanges monitor transactions using CipherTrace, Elliptic and Crystal Blockchain solutions.
Since 2020 regulated exchanges have implemented services for automatic tax reporting. For example, American crypto exchange Gemini integrated the Tax Center Suite from TaxBit.
STEX forms tax reporting using three smart services: Cointracking, Koinly and Zenledger. Cointracking analyzes trades on the exchange, while Koinly and Zenledger calculate and optimise taxes.
Conclusions
Cryptocurrencies continue to raise concerns among EU authorities. In January the head of the European Central Bank Christine Lagarde called bitcoin a speculative asset used for money laundering. In March the European Securities and Markets Authority (ESMA) warned investors about the risks of losing all funds when investing in digital assets.
Vadim Kurilovich is confident that the appearance of MiCA signals regulators’ willingness to engage with industry representatives:
“Unified rules of the game are achieved only through regulation. Unified rules protecting users as well. MiCA is designed to address these issues. The draft will enable the EU to build a strong economic sector — with a level playing field and healthy competition.”
Perhaps regulators will soon develop a compromise version of the draft that satisfies all market participants.