Posted by Martin Bartlam and Pierre Berger on 23 June 2023
Tagged to Cryptoassets, Digital Assets, MiCA, Regulation

After a long and much-debated legislative process, the Markets in Crypto-assets Regulation and the Transfer of Funds Regulation were finally officially published in the European Official Journal on 9 June 2023.

After a long and much-debated legislative process, the Markets in Crypto-assets Regulation and the Transfer of Funds Regulation were finally officially published in the European Official Journal on 9 June 2023.

The Markets in Crypto-assets Regulation sets out a comprehensive and harmonised framework for the regulation of crypto-asset markets across the EU. It will regulate crypto-asset issuers and Crypto-assets service providers. The revised Transfer of Funds Regulation requires crypto-asset service providers to accompany transfers of Crypto-assets with information on the originators and beneficiaries.

These two new European Regulations lay the foundation for a new regulatory framework for Crypto-assets in the EU. In this alert we analyse the key elements of these two new regimes, assess their impact for the market and highlight the opportunities they will bring.

Introduction and context

In 2018, the European Commission presented its FinTech Action Plan,1 by which it asked the European Supervisory Authorities to further work on Crypto-assets.

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) both published a report in January 2019, in which they found out that only a limited portion of Crypto-assets could qualify as financial instruments under Directive 2014/65/EU on markets in financial instruments (MiFID II), or e-money under Directive 2009/110 on electronic money institutions (Electronic Money Directive II or EMD II). But the majority of Crypto-assets is likely to fall outside the existing European financial services regulations. This means that, until now, there were no rules harmonized at European level, other than those in respect of anti-money laundering, for the provision of services related to such unregulated Crypto-assets.

The absence of such rules left holders of those Crypto-assets exposed to risks, in particular in fields not covered by consumer protection rules. It could also result in substantial risks to market integrity, including in terms of market abuse and financial crime. Finally, the absence of an overall EU framework for markets in Crypto-assets also meant there was a lack of user confidence in those assets (in particular for incumbent financial institutions and institutional investors), which could significantly hinder the development of a market in those assets and lead to missed opportunities in terms of innovative digital services, alternative payment instruments or new funding sources for EU companies.

On the side of anti-money laundering, transfers of Crypto-assets were not included in the scope of Regulation (EU) 2015/847 on information accompanying transfers of funds, which only applied to transfers of funds (eg banknotes or coins). The latest changes introduced in June 2019 in the FATF standards introduced new and similar obligations for crypto-asset service providers, with the purpose of facilitating the traceability of transfers of Crypto-assets.

A new dedicated and harmonised framework for markets in Crypto-assets was necessary at EU level to provide specific rules for Crypto-assets and related services and activities that are not yet covered by EU legislative acts on financial services. It would also have to include the transfers of Crypto-assets in the scope of the existing rules on anti-money laundering.

Digital finance package

In September 2020, the European Commission presented the Digital Finance Package, a package of measures aimed at developing and regulating the use of digital finance in the EU. The Digital Finance Package contained several legislative proposals on Crypto-assets , including a proposal for a Regulation on markets in Crypto-assets , a proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT Pilot Regime), and a proposal for a Regulation on digital operational resilience for the financial sector (DORA).

AML package

In July 2021, the European Commission also presented the AML Package, a new package of measures to overhaul the European anti-money laundering regulatory framework, which contains a proposal to recast the Regulation 2015/847 of 20 May 2015 on information accompanying transfers of funds to include Crypto-assets transfer in its scope. This aimed at extending the information requirements currently applying to wire transfers to Crypto-assets transfers, with the necessary adjustments needed due to the differences in some of their features.

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