New European Union (EU) Crypto Regulations

The speedy adoption of crypto assets has attracted the attention of regulators. While CEX (centralized Exchanges) platforms might be least concerned as they are mostly compliant, DEX (decentralized) exchanges are on the receiving end. The EU( European Union) seems to be taking the frontline in the battle to place checks and balances in the crypto industry. 
Often, members discuss different issues including consumer protection, the environmental impact of Non Fungible Tokens (NFTs), Bitcoin assets, and DeFi (Decentralized Finance), to mention a few. However, the recent tighter rules on crypto transactions are pretty unsettling. The driving factor is the freewheeling nature of decentralized exchanges. As a result, lawmakers are concerned that the DeFi( Decentralized Finance) ecosystem provides the perfect environment for money laundering activities. These platforms are also said to be breeding grounds for terrorism financing. On top of that, there are fears that the $2.1 trillion crypto industry can upset financial stability on a global level.

An Overview of the EU Crypto Laws

The EU regulatory framework is embodied in the MiCA (Markets in Crypto Assets) bill. MiCA advancement could lay the foundation for the global regulation of Bitcoin and its peers. Before the MiCa era, however, member countries in the EU had individual governing rules. Over time, the need for a collective approach became necessary. The initial discussions started in 2018 under the 5th Money Laundering Directive (5MLD). It was followed by the 5AMLD (5th Anti-Money Laundering and Counter-Terrorist Financing Directive) in January 2020. Both directives were to help regulate crypto exchanges. The 5AMLD, however, was more stringent and required exchanges to:
  • Comply with AML (Anti-Money Laundering )laws
  • Observe data-sharing requirements
  • Register their businesses with respective EU authorities
In September 2020, the MiCA draft was first presented for discussions. The 168-page document made it mandatory for exchanges to publish their white paper 20 days before listing their services online. The draft also included highlights on stable coins. Tighter measures came with the 6AMLD (6TH Anti-Money Laundering and Counter-Terrorist Financing Directive). It included even more stringent measures to counter money laundering activities, including persecution and punishment of legal persons.
Most recently, in March 2022, the draft was revised further. However, adoption wasn’t immediate due to controversy on portions regarding Ether and POW( Proof Of Work). As a result, the need for revision was inevitable, which resulted in delays. Proof-of-Work (PoW) is a decentralized mechanism that helps to validate transactions across the Bitcoin network. The process is known as mining and often consumes a lot of electrical energy leaving behind a controversial carbon print. This, too, is under scrutiny by the EU law enforcers and globally too. Amid the pending issues around PoW mining, digital exchanges will be required to identify all crypto transactions, no matter how insignificant. Further, Anti-Money Laundering rules will extend to cryptocurrency payments of less than EUR 1,000 ($1,114).
In sharp contrast, the current bank limit stands at over EUR 1,000, indicating the push by the regulator for the crypto market to follow suit. In addition, the scope extends to both private and public wallets. However, industry leaders have been opposing the proposed laws citing difficulties with running hosted wallets and the possibility of mass migration of exchanges to friendlier jurisdictions. Nonetheless, the EU isn’t about to back off. 
These new regulations in the EU are here to stay. As DEXs and other VASPs grapple with the complexities of these new regulations, it is imperative they seek help from more experienced companies that can help them navigate these legal terrains. One company that can help crypto-companies handle compliance challenges is Ahrvo Comply. This company has developed capacity and is specialized in Identity Management and Transaction Monitoring solutions. These solutions can help companies meet EU regulatory requirements as we move to the next phase of intense crypto regulation.
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