On 30 June 2022, the European Union reached a provisional agreement on a landmark regulatory framework for the cryptocurrency industry, featuring new EU crypto regulations. The framework, known as Markets in Crypto Assets (MiCA), will regulate unbacked crypto-assets and stablecoins along with the cryptocurrency exchanges and wallets in which those assets are held, and will introduce a range of new compliance requirements for service providers. MiCA follows the introduction of the Transfer of Funds Regulation (TFR) which passed on 29 June and which focuses on anti-money laundering (AML) and counter-financing of terrorism (CFT) protections for cryptocurrency service providers.
Expected to come into effect in 2024, MiCA and the TFR are intended to create a harmonised regulatory regime for cryptocurrency service providers in all EU member states. These new EU crypto regulations are legislatively intertwined, with aspects of the TFR only applicable via MiCA.
Understanding the EU’s Crypto Regulations
What is MiCA?
Markets in Crypto Assets represents the EU’s first attempt at implementing a comprehensive regulatory regime for digital assets, ensuring a high level of consumer protection, market integrity, and financial stability across the industry. The proposed regulation was passed following a series of high profile stablecoin collapses, including the TerraUSD crash that saw over $200 billion wiped off the crypto market in a single day. Under MiCA, the following rules will come into effect:
- Issuers of stablecoins will be required to build up and maintain a sufficient liquid reserve to ensure redemption requests from holders can be honoured, even in the event of a mass withdrawal.
- Crypto-asset service providers will be required to obtain authorisation from a national authority in order to operate.
- The European Banking Authority (EBA) will create and maintain a public register of crypto-asset service providers that are found to be non-compliant with the regulations.
What is the TFR?
The Transfer of Funds Regulation is intended to address the anonymity risks that are associated with cryptocurrency transactions and that criminals frequently exploit to launder money and fund terrorist activities. The regulation reflects Financial Action Task Force (FATF) Recommendation 16, known as the ‘Travel Rule’, which requires financial service providers to trace cross-border transfers of funds as part of their Know Your Customer (KYC) process. Under the Transfer of Funds Regulations, the following rules are in effect:
- Cryptocurrency exchanges are required to obtain the personal data of all parties involved in crypto asset transfers. The requirement applies regardless of the size of the transfer.
- The personal data collection requirement also applies to transactions involving unhosted wallets that are not managed by crypto exchanges when those transactions exceed €1,000.
- Before assets can be released to a beneficiary, service providers must screen to ensure that the beneficiary is not designated on any sanctions lists or subject to other restrictive measures.
- Cryptocurrency exchanges must provide the personal data that they collect to authorities when requested.
TFR rules will not apply to cryptocurrency transactions conducted directly between private wallets – only those that involve an exchange platform. Prior to the introduction of the TFR, cryptocurrency transactions were subject to the FATF Travel Rule but only in cases where funds were equal to or greater than $3,000.
MEP Assita Kanko emphasised the compliance benefits of the TFR in addressing money laundering, terorrism financing and other serious financial crimes: “Today, we have taken a big step to address these problems. It will be much harder to misuse crypto-assets and innocent traders and investors will be better protected. The extended travel rule will make that world safer”.
Crypto Regulations in the UK
Although the UK left the EU in January 2020, it has broadly matched the bloc’s crypto regulatory landscape. As of 2022, the UK had implemented cryptocurrency regulations equivalent to the measures introduced by the EU’s Fifth Anti-Money Laundering Directive (5AMLD) and Sixth Anti-Money Laundering Directive (6AMLD). Those directives included the following regulatory measures:
- 5AMLD set out a legal definition of cryptocurrency and applied existing AML/CFT regulations to crypto assets and exchanges. The directive also required crypto service providers to register with their domestic financial authorities.
- 5AMLD gave national financial intelligence units (FIU) the authority to obtain the personal details of cryptocurrency holders from service providers.
- 6AMLD introduced 22 new predicate offences – requiring crypto service providers to expand the scope of their AML/CFT screening and monitoring.
- 6AMLD also extended criminal liability for money laundering offences to senior management figures – meaning that crypto service providers must ensure their leadership retains oversight of AML/CFT controls.
While the UK is likely to align closely with the new EU crypto regulations, there are indications that it may diverge from its continental counterpart, or even introduce more stringent cryptocurrency compliance measures in the future. In January 2022, for example, the UK Treasury strengthened financial advertising regulations in order to bring cryptocurrencies into line with other types of financial promotion. In April 2022, the UK government announced that it would be bringing stablecoins into the scope of AML/CFT regulations. As part of the government’s ambition to make the UK a global hub for crypto-asset technology, it also announced that it would be introducing a financial market infrastructure sandbox to help crypto firms innovate within the UK’s regulatory environment.