EU lawmakers approve world’s first comprehensive crypto regulation

Lawmakers in the European Parliament have approved the world’s first comprehensive package of rules aimed at regulating the cryptocurrency industry.

In a vote on Thursday, the European Parliament voted 517 to 38 to pass the Markets in Crypto Act, or MiCA. The legislation, which seeks to reduce the risk for consumers buying cryptoassets, will mean that providers could be held liable if they lose investors’ cryptoassets.

The rules will impose a range of requirements on crypto platforms, token issuers and traders around transparency, disclosure, authorization and supervision of transactions, the European Parliament said in a statement on Thursday.

Platforms will be required to inform consumers of the risks associated with their operations, while sales of new tokens will also come under regulation.

Stablecoins such as tether and Circles USDC will be required to maintain ample reserves to meet redemption requests in the event of mass withdrawals. Stablecoins that get too big also face being capped at 200 million euros ($220 million) in transactions per day.

The European Securities and Markets Authority, or ESMA, will be empowered to step in and ban or restrict crypto platforms if they are deemed not to properly protect investors, or threaten market integrity or financial stability.

MiCA also addresses environmental concerns surrounding crypto, with firms forced to disclose their energy consumption as well as the effect of digital assets on the environment.

Mairead McGuinness, European Commissioner for Financial Services, hailed the law’s approval Thursday and said she expects the rules to take effect “from next year.”

Andrew Whitworth, EMEA policy director for blockchain firm Ripple, said the parliamentary blessing marked “an important milestone for the crypto industry around the world.”

“Consistency in implementation around the EU will be key to giving crypto companies the operational clarity to drive innovation across Europe and protect against unwitting fragmentation of the single market,” Whitworth told CNBC via email.

“As part of this, there is a need to ensure that legislation is applied proportionately with respect to how different companies’ crypto offerings are treated, based on the risk profiles of their activities.”

Parliament also approved a separate law aimed at reducing the anonymity involved in transfers of cryptocurrencies such as bitcoin and stablecoins, voting 529 to 29 to pass the Transfer of Funds Ordinance.

This applies to the so-called “travel rule”, which requires financial companies to screen, register and communicate information about both the sender and receiver of crypto transactions to help fight money laundering.

Transfers between exchanges and so-called “self-hosted wallets” owned by individuals will have to be reported if the amount tops the threshold of 1,000 euros, a contentious topic for crypto enthusiasts who often trade digital currencies for privacy reasons.

In a tweet, Changpeng Zhao, CEO of the world’s largest crypto exchange Binance, said his company was “ready to make adjustments to our business over the next 12-18 months to be in a position of full compliance.”

Binance is under intense scrutiny from regulators about how it operates. In March, the Commodity Futures and Trading Commission sued Binance, Zhao and Binance’s former chief compliance officer, Samuel Lim, alleging that the company actively solicited US users without permission.

Zhao hailed MiCA as a “pragmatic solution to the challenges we face collectively.”

Regulators have attempted to rein in the crypto market in the wake of a series of catastrophic industry failures. In May, terraUSD, a controversial stablecoin project, collapsed in a $60 billion flameout after investors lost confidence in its technical underpinnings.

The demise of terraUSD caused a chain reaction in the industry, with various other firms including Three Arrows Capital, BlockFi and Voyager Digital also going bankrupt. FTX, formerly the fourth-largest crypto exchange, filed for bankruptcy in November in the crypto industry’s most high-profile failure to date.

The move puts the EU a step ahead of the US and UK, which have yet to introduce formal rules for the crypto space. A UK official said on Monday that specific crypto regulation could take effect within a year or so.

Once the EU laws come into effect, crypto companies will be able to use their licenses in one European country to “pass” their services across different member states. Crypto companies have been scrambling to get licenses from various European authorities and open new offices in anticipation of the law taking effect.

Crypto exchanges Coinbase and Kraken have recently been granted virtual asset service provider licenses in Dublin. The blockchain company Ripple is seeking a license from the Irish central bank.

US crypto companies have looked abroad for expansion in response to tough regulatory moves on their home turf. The Securities and Exchange Commission issued Coinbase with a Wells notice, which is often one of the last steps before the regulator formally issues charges, last month.

On Thursday, Coinbase CEO Brian Armstrong told CNBC at a fintech event that the company is prepared for a “year-long” legal battle with the SEC.

He said separately in a speech on stage that the US “has the potential to be an important market in crypto”, but right now he is not providing regulatory clarity. If this continues, he said, Coinbase will consider options to invest more overseas, including moving from the US to other locations.

– CNBC’s Arjun Kharpal contributed to this report

SEE: FTX’s collapse shakes crypto to its core. The pain may not be over