European regulators send mixed messages on cryptocurrencies
Cryptocurrency trading in Europe will be coming under increased scrutiny following a recent report by Brussels-based think tank Bruegel that recommended EU policymakers try to improve their understanding of the economic potential of blockchain technology.
The report was written at the request of the Austrian Presidency of the Council of the EU for the informal Economic and Financial Affairs Council meeting of EU finance ministers and central bank governors.
Although senior staff from Bruegel said there should not be a rush to regulate the industry, they did want to ensure policymakers understood the challenges faced by the new cryptocurrency space and that they were in a position “in which they’re able to act.”
Six public policy questions
The report, co-authored by Bruegel’s director Guntram Wolff and deputy director Maria Demertzis, analysed and assessed the economic potential and risk of crypto assets and discussed key regulatory questions that EU policymakers need to confront.
It said that crypto assets – broadly classified as cryptocurrencies and initial coin offerings (utility tokens or securities tokens) – raise six major public policy questions. These are:
- How great is the potential of crypto assets in advanced financial systems?
- What is the best way to combat illegal activity such as money laundering and terrorism finance?
- How can consumer and investor protection be ensured?
- What about financial stability?
- How might crypto assets be taxed?
- How can blockchain applications be embedded into the existing legal framework?
Research centred on whether crypto assets should be isolated, regulated or integrated? Authors said this was an important question as generalised regulation could prematurely provide legitimacy to the regulated entity. Also, if something is regulated and supervised, it has a stamp of quality.
It added: “Yet, the proposal to basically isolate crypto assets by focusing their regulation on the interface and limiting the ability of banks or funds to invest in crypto assets has significant drawbacks.
“First, this intervention in itself might limit the development of crypto assets much more significantly than direct regulation of the assets. In particular, without gaining access to investment and savings funds, it might be impossible for the market to grow. Innovation would then be mostly directed at fringe uses.”
The report also highlighted that currently a variety of national and EU-level supervisors apply the existing regulatory framework, sometimes in different ways, and it might be more sensible to empower one supervisor to eventually be in charge of the entire crypto asset world.
Currently, however, it conceded it might be more useful to sustain different practices across EU countries for some time as a way to experiment and learn about the best approaches to this fast-developing technology.
Regulation across Europe
So far, EU authorities have avoided comprehensive regulation because of the sector’s relatively small size and the low percentage of trade in bitcoin, the most popular cryptocurrency, into euros.
The meeting in Vienna comes after a period of high volatility in the cryptocurrency market with regulation announcements impacting the price of bitcoin and other cryptocurrencies in 2018. At the time of writing, the market capitalisation of all the digital assets tracked by CoinMarketCap had shrunk to $196bn from a peak of more than $800bn in January while trading volumes have followed suit.
Global regulators have been divided on the issue of cryptocurrency regulation and each country has different standards. The UK Financial Conduct Authority, for example, recently announced plans to launch a global network with states and institutions to introduce regulation that minimises risks associated with cryptocurrency assets.
Whereas, the German federal government examined whether bitcoin and other cryptocurrencies posed a threat to the financial stability of the country, and announced in June that it has found no such risks.
The response was in reaction to the questions asked by the third largest political party in Germany’s Parliament, Alternative for Germany (AFD). According to the report, the conclusion was reached, “due to the small market capitalization of Bitcoin and other crypto tokens and the limited interlinkages with the financial sector.”
It added that although it recognizes the potential of cryptocurrencies to be used in money laundering and terrorist financing, a more coordinated regulatory effort between countries could be more effective.
Malta, however, has been opening its doors to digital innovation and companies that are looking for shelter from regulatory uncertainty in the US and Asia. The government recently passed three laws – the Malta Digital Innovation Authority Act, the Innovative Technological Arrangement and Services Act, and the Virtual Financial Asset Act – so companies can easily issue new cryptocurrencies and trade existing ones.
According to Silvio Schembri, Malta’s Junior Minister for Financial Services, the country is the first to provide legal certainty to the cryptocurrency field and this will facilitate investors as companies now have the necessary means to operate in a fully regulated environment.
He added that this will hopefully attract further investments in the country: “I am optimistic that further companies will choose Malta to operate from with a system that offers stability and that will eventually result in further economic growth.”
Other non-EU countries such as Bermuda, Gibraltar and Liechtenstein have also recently passed laws, or have legislation in the works, to make themselves more welcoming to cryptocurrency companies and projects.
Premier of Bermuda, Edward David Burt, said in an interview at a New York cryptocurrency conference in May: “We are 65,000 people, and 20 square miles, but we have a very advanced economy. We want to position Bermuda as the incubator for this industry.”
Vibrant blockchain scene
The last thing the EU will want is to miss out to non-EU neighbours. European innovators and entrepreneurs are already offering blockchain-based solutions and Member States have announced initiatives as they seek to reinforce their use of blockchain technology.
The European Commission also launched the EU Blockchain Observatory and Forum in February to highlight key developments of the blockchain technology, promote European actors and reinforce European engagement with multiple stakeholders involved in blockchain activities.
A report in July outlined Europe’s “vibrant” blockchain scene, its competitive advantages in the space, and how it could benefit from its historic ability to collaborate across borders. The report also suggested that certain regulations should be clarified to accommodate blockchain technology and cryptocurrencies.
Top of the list was resolving the tensions between GDPR and blockchain as well as clarifying the legal, fiscal and accounting status of tokens, along with the rules surrounding the exchange of crypto assets and fiat money.
Threatened regulation in the blockchain arena has stalled in many countries as the global conversation about the balance of risk versus innovation continues.
The EU Observatory and Forum said that while Europe can count its well-developed legal and regulatory environment as an advantage in developing a suitable framework for blockchain technology over the long term, today there are fundamental areas that this technology touches on in which there is no or little legal and regulatory clarity or unity. Such lack of clarity can put a chill on innovation.
At the moment, it seems that most regulatory bodies agree that no wants to rush through bad regulation and that while cryptocurrency regulation is necessary, it is not urgent.
As the Bruegel report concludes, exchanges seeking jurisdictions with lighter regulation might need to be tolerated for some time “to experiment and learn about the best approaches to this fast-developing technology”.