EY crypto regulation
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On Thursday, the European Parliament passed the first comprehensive set of crypto regulations in the European Union, giving the region a competitive edge over the United States, where regulatory uncertainty continues to hamper the growth of the crypto market.

The new rules, which garnered 517 votes in favor and 38 against, will regulate the issuance and trading of crypto assets such as Bitcoin.

Stefan Berger, the lawmaker responsible for guiding the rules through parliament, said he hopes the regulations will make the EU more inviting for crypto companies.

“This regulation brings a competitive advantage for the EU. The European crypto-asset industry has regulatory clarity that does not exist in countries like the U.S.,” he said.

America’s Ambiguous Approach: Losing Ground on Crypto Regulations

Meanwhile, in the United States, the struggle with regulations is hurting the country’s crypto market, with several companies choosing to leave the US market or avoiding it altogether.

One such example is Nexo, which exited the US market last year after more than 18 months of unproductive discussions with state and federal regulators.

Coinbase could be the next one to leave the country as CEO Brian Armstrong expressed his concerns regarding the US regulatory environment.

“I think the U.S. has the potential to be an important market for crypto, but right now we are not seeing that regulatory clarity that we need,” he said at a recent fintech conference in London.

Armstrong went on to say that if the situation doesn’t change, Coinbase may consider relocating or investing more in other parts of the world.

Meanwhile, Jeff Dorman, chief investment officer at Arca, recently noted that new companies his firm is exploring are “not even bothering with the US.”

And by the same token, Jason Gottlieb, partner and chairman of the digital assets department at law firm Morrison Cohen LLP, has shared a similar sentiment, advising several projects to avoid the US market altogether.

A European Blueprint

In contrast to the US, the EU’s new crypto regulations provide a clear framework for the industry. Firms that issue and trade crypto assets will now be required to obtain a license from a national regulator, granting them permission to operate across the 27-member bloc.

Additionally, major service providers will have to disclose their energy consumption.

The new rules also include measures for tracing transfers of crypto assets. These regulations apply the international “travel rule” already used in traditional financial transactions, meaning that information on the source and recipient of the crypto asset must accompany and be stored on both sides of the transfer to help combat money laundering.

This tracing rule also covers transactions above 1,000 euros from “self-hosted” wallets or crypto addresses of private users.

Mairead McGuinness, the EU’s financial services chief, expressed his views during a debate on the rules on Wednesday, stating, “I hope that our rules could become a model for other countries.”

The legislation is expected to come into force in July, with specific requirements taking effect gradually over time.

The implementation of a unified regulatory framework across the EU is likely to attract digital-asset companies and put pressure on other jurisdictions, such as the US, to hasten their crypto regulatory efforts.

“It would be a surprise if other jurisdictions like the UK and the US aren’t quick to follow suit and further accelerate their crypto regulatory efforts,” remarked Alisa DiCaprio, the chief economist at enterprise blockchain firm R3,

Despite the EU’s progress, the new crypto regulations have their critics. Some argue that the rules are outdated before even taking effect, while others claim that they would do little to prevent some of the most recent high-profile crypto failures.

Additionally, crypto lending, decentralized finance, and nonfungible tokens remain outside the scope of these regulations, prompting calls for updates.

Crypto firms have also taken issue with the regulation of stablecoins. Under the new EU rules, stablecoin operators will be required to maintain local reserves and face trading caps on non-euro-denominated tokens that aren’t backed by fiat currency.

A Balancing Act: Striving for Anonymity and Compliance

Critics have also pointed out that complying with the bloc’s Travel Rule could undermine the ability of the crypto sector to provide anonymity to its users. Exchanges will be required to provide information on senders and recipients for every transaction to authorities and pay particular attention to self-hosted wallets sending more than €1,000 ($1,097).

However, firms will have a grace period to adjust to these crypto regulations before they are expected to comply. Rules on stablecoins will take effect from July next year, while the broader regulation of crypto asset service providers and the expectation for them to meet the Travel Rule will be enforced from January 2025.

Despite criticisms, many industry leaders still see the EU’s approach as a positive development. The US has primarily led with enforcement actions against major players rather than pushing for sector-specific legislation, which has led companies like Coinbase, Circle, and Binance to expand their presence in Europe.

Coinbase vice president for business development Nana Murugesan acknowledged the transition period, saying, “Once MiCA comes in, it’ll become much more of a pan-European bloc strategy.”

Murugesan also referred to Europe’s regulation of crypto as a “work in progress.”

While Europe forges ahead with its regulatory efforts, the US remains at a standstill when it comes to implementing clear and comprehensive crypto regulations.

If the US does not act swiftly to address this regulatory gap, it risks losing ground to Europe, which seems to be more proactive in creating a favorable environment for crypto businesses to thrive.

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