Where do we stand around crypto regulation in Europe?

Insights from the crypto roundtable at the German Bundestag

Author: Jonas Gross

On September 30, I was invited to participate in the second crypto roundtable initiated by the German Free Democratic Party (FDP), in particular by Frank Schäffler. Topic of the discussions was the upcoming crypto regulation in Europe, namely the Markets-in-Crypto-Assets Regulation (MiCA) and the Transfer of Funds Regulation. After short presentations by representatives of the German regulator BaFin and the German Ministry of Finance, feedback on the current regulatory proposals from blockchain and crypto experts was collected. This feedback is intended to be included in the upcoming negotiations. My key observations are summarized in this article (key statements in bold).

Presentation by State Secretary Dr. Florian Toncar (German Ministry of Finance)

Mr. Toncar stressed that the MiCA regulation, for regulators and politicians, is seen as a chance for Europe to set a global blueprint around crypto regulation. It is the goal to make Europe attractive for crypto companies. Over-regulation should be avoided, because otherwise innovative companies would move to other jurisdictions. MiCA is expected to be announced in January 2023 and will apply after an 18 month transitory period (exception are member states that want to have a shorter transitory period).

MiCA and also the Transfer of Funds Regulation are currently negotiated between the European Parliament and the ECOFIN Council. The initial proposal raised concerns about the proposed identification and verification requirements for users of self-hosted wallets. While it was proposed that for self-hosted wallets users need be to identified and verified for every single transaction independent of transaction size, Germany supported the approach to identify the users for every transactions, but without the necessity to verify this information. Currently, it seems that a compromise will be reached that says that users need to be identified for every transaction and verified for transactions that exceed 1.000€.

Presentation by Oliver Fußwinkel (Head of Financial Technology Innovation at BaFin)

Mr. Fußwinkel mentioned that MiCA is only one step in the regulatory process around blockchain-based assets and crypto assets, as these markets are very dynamic. Further regulations, e.g., around decentralized finance (DeFi) and non-fungible tokens (NFTs), will be required in the future. The regulation should lead to a location advantage for Europe and Germany that drives institutional interest. Regulatory arbitrage should be avoided. According to Mr. Fußwinkel, the following assets will be regulated under MiCA:

1. Asset-Referenced Tokens (ARTs): Tokens that are backed by a basket of different fiat currencies, commodities, or crypto assets. These assets will be subject to strict regulation, similar to the regulation of money market funds.

2. E-Money Tokens (EMTs): These tokens are backed by one single fiat currency and are only allowed to be issued by banks and e-money institutes. Elements from banking supervision/liquidity risks are included in the regulation of EMTs.

3. Other cryptoasssets (including utility tokens)

Further, against public perception, DeFi is in scope for MiCA. This is e.g., the case if a DeFi project creates a token that falls under MiCA, such as ARTs or EMTs. As MiCA is not an infrastructure regulation, DeFi infrastructure does not fall under the scope of MiCA, but tokens do. NFTs are primarily out of scope for the MiCA regulation. Fully out of scope are financial instrument, also based on DLTs, that would fall under securities law.

The MiCA regulation will apply for issuers of the respective tokens, that need to get permission for issuance, and service providers (not for developers). According to preliminary analyses by BaFin, business of more than 100 companies that are operational today would fall under the scope of MiCA. The MiCA regulation will be re-evaluated after 18 months.

Besides MiCA, Mr. Fußwinkel also gave some interesting insights from other crypto regulations. In particular, he mentioned that there will be a simplified process to get a MiCA license for institutions that have already received national crypto licenses, such as the crypto custody license in Germany. This year, 5 new companies have registered for the German crypto custody license — in total approx. 20 since its launch in 2020.

My conclusion

I welcome that the most controversial aspects of the MiCA regulation, i.e., around the regulation of self-hosted wallets and a potential — in the summer discussed — ban of proof-of-work-based services, have been addressed and a good compromise has been reached. Roundtables like this one are great ways to bring politics and the crypto and blockchain sector together. These discussions are necessary to learn from each other and understand each other’s position to, in the end, derive a regulation that both supports innovation and addresses major risks. I would also appreciate similar roundtables and discussions of other German parties with industry experts to exchange and discuss, to, in the end, address misunderstandings about crypto assets and see the advantages of the technology.

About the author

Dr. Jonas Gross is Head of Digital Assets and Currencies at etonec GmbH. Jonas holds a Ph.D. in economics from the University of Bayreuth (Germany), and his main fields of interest are central bank digital currencies, stablecoins, cryptocurrencies, and monetary policy. Further, Jonas is Chairman of the Digital Euro Association (DEA), co-host of the German podcast “Bitcoin, Fiat, & Rock’n’ Roll”, and member of the Expert Panel of the European Blockchain Observatory and Forum. You can reach Jonas via jonas@etonec.com.

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Jonas Gross

Jonas Gross is Chairman of the Digital Euro Association (DEA) and Head of Digital Assets and Currencies at etonec. Further, Jonas holds a PhD in Economics.