Analyst Note: EU Crypto Regulation Update

Key Insights

• One of the most important pieces of crypto legislation to date was finalized in the EU.
• The regulation puts more strict requirements around stablecoins and virtual asset service providers (i.e., exchanges).
• NFT and DeFi legislation will be addressed in future bills tentatively scheduled to be released in 2023 and 2024.

After at least three years of discussion, the EU has finally reached an agreement on major pieces of a regulatory framework for crypto. Late last week, the EU Parliament agreed on how to implement a policy mainly focused on crypto wallets, known as the Transfer Funds Regulation (TFR), and another bill focused on everything from stablecoins to exchanges, called the Markets in Crypto-Assets (MiCA). The main goals of the legislation are to create regulatory certainty across the EU while improving consumer protection and financial stability.

The TFR is the EU’s implementation of the Travel Rule (TR), an anti-money laundering policy, that requires financial companies to collect information on their customers. The TR was created by the FATF (Financial Action Task Force), an organization of 37 member states combatting money laundering and terrorist financing. In 2019, the FATF recommended that crypto or virtual asset service providers (CASPs or VASPs) fall under the TR and collect information on customers for crypto transactions over $1,000. Last week the EU Parliament took the recommendations from the FATF and finalized the TFR. The implications are that VASPs will have to collect customer information for transfers to other VASPs or unhosted wallets. While they will collect and store this information they will only be required to share it if a court deems it necessary. Peer-to-peer transfers will not be subject to TFR. A big win. Early version of the legislation would have banned self-hosted wallets and tried to police peer-to-peer transactions.

The MiCA bill is the first piece of legislation in what will be a series of bills out of the EU regulating crypto, including a version focused on DeFi in 2023 and one on NFTs in 2024. MiCA puts strict restrictions on large (10 million users or more than 5 billion euros in reserves) stablecoin issuers. Requiring them to have a reserve, fall under regulatory supervision, and a cap of 200 million euros per day in transactions. Interestingly, nothing in the legislation bars algo-stablecoins.