A new law by the European Union looks set to increase regulation over the cryptocurrency industry, reining in what has been called the ‘Wild West’ of finance. This latest news on cryptocurrencies could be both a blessing and a curse. This regulation could impede some of the natural advantages of cryptocurrencies - but could also make both the industry and the use of cryptocurrencies as a payment method more viable in the long run.
Having hit the height of their popularity during the pandemic, these often volatile markets have suffered their worst period in years. The flagship cryptocurrency Bitcoin recently experienced its worst quarter in over a decade, and the idea as a whole has been tarnished by its association with ‘NFTs’ (Non-Fungible Token - a financial security of digital data stored in a blockchain.)
What are cryptocurrencies?
For the uninitiated, cryptocurrencies are entirely digital currencies that are secured by powerful encryption. Cryptocurrencies are typically decentralised, meaning that they are not controlled and managed by a single entity, such as a government or bank. Instead, they exist in a sort of public database that is regularly synchronised across multiple locations around the world, so that the loss of one location does not impact the entire currency.
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Cryptocurrencies are stored in digital wallets, which have a public and a private key. The private key allows you to write to the database, spending your cryptocurrency, while the public key allows others to send that cryptocurrency’s ‘coins’ to your wallet. Each time a cryptocurrency transaction happens, the public database is updated with a new entry that contains immutable proof of its authenticity, ensuring transaction data cannot be spoofed or modified.
Cryptocurrencies can be purchased with other currencies, transferred to others, or earned through ‘mining’, where individuals contribute the power of their computers to the network that processes the transactions. The more coins are produced through this method, the longer and more resource intensive the process becomes, ensuring that the currency is not devalued. This has led to concerns around the growing power usage attributed to cryptocurrency mining.
What are the new EU rules on cryptocurrencies?
The new Markets in Crypto-assets (MiCA) law formulated by the European Parliament and EU member states has been designed to regulate what has, up until this point, been a largely unregulated market. Under previous EU laws, issuers of cryptocurrencies and cryptocurrency service providers (e.g. exchanges) only had to comply with money laundering controls. The new law aims to achieve two things: incorporation requirements and consumer protections.
Any business involved in cryptocurrencies will have to obtain a passport to operate across the EU. To qualify, they will have to meet standards for market integrity and consumer and investor protection, similar to those applied to real-world currencies. Crypto assets will also be subject to minimum environmental sustainability standards, in a move to address the growing concern around energy usage attributed to the sector (estimated by some as 0.2% of global energy demand).
The law also makes a distinction between the kinds of cryptocurrencies used for payments, and what are known as ‘stablecoins’, which are cryptocurrencies pegged to other currencies in order to reduce volatility. These stablecoins - referred to as “asset references tokens” - will be supervised by the European Banking Authority, while the tokens used for payments will be supervised by the European Securities and Markets Authority.
What does this mean for businesses?
The news about the law has received a mixed reception from the cryptocurrency community. Some believe that the addition of regulations may be a slippery slope, and undermines the biggest appeal of cryptocurrencies, which is that they are not managed by and subject to banks or governments. The legislation could have a particularly strong effect on stablecoin issuers, where the need to maintain a reserve and limit transactions could reduce opportunities for profits.
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For the most part, though, the new law has been welcomed inside and outside of the sector. Most cryptocurrency businesses recognise the issues posed by the lack of stability, and the detrimental impact of recent cryptocurrency sell-offs and crashes. Regulation does not have to be synonymous with handing over control, as core aspects of cryptocurrencies cannot be controlled - and some would argue that financial institutions already influence cryptocurrencies through advertising and investments.
For businesses who accept cryptocurrencies, or are interested in doing so, the new law can only be a positive development. Cryptocurrencies work for businesses because the transaction fees are often lower than equivalent payment providers for real-world currencies; because they potentially open the business to new customers; and because businesses hope that the value of these coins will rise more over time than real-world currencies, which tend to be more stable. All of these aspects should be better served by a more stable and reputable cryptocurrency economy.
The new EU law represents an uncertain but inevitable development for cryptocurrencies - yet also one which could come with plenty of upsides. While the cryptocurrency market has been in a ‘Wild West’ period that has offered the excitement of big wins and losses, this was never sustainable.
The new EU legislation promises to sand off the rough edges and make cryptocurrencies a safer, more legitimate alternative to traditional currencies. At the same time, it looks set to retain many of the benefits - and is likely to be the first of many similar laws around the world.
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