Last Tuesday, on September 4, the European Parliament held hearings on the new draft law on the regulation of ICOs. As explained by one of the authors of the draft, Ashley Fox, a startup that has passed through the ICO stage can use the funds only within the country in which it is registered. The new initiative offers access to European companies to the entire E.U. market, which now consists of 28 countries, under several conditions. Among them, a third party company conducts a procedure for compliance, implementing the rules for the identification of investors (KYC) and anti-money laundering (AML). In addition, the size of funds raised should not exceed eight million euros due to existing regulations. Fox explained that these conditions will be voluntary. The final decision on the initiative of legislators should be taken by the end of February next year.
This is just one of the many episodes of the discussion about the future of cryptocurrencies in the European Union, one of the world's largest economies. The states of the European Union form a single economic space, the total nominal GDP of which is estimated in 2018 at $20 trillion. Some European countries already regulate cryptocurrencies, but there is no single position at the E.U. level yet.
Its formulation was facilitated by a meeting of E.U. finance ministers, which was held in Vienna on September 7th and 8th. Several issues were discussed including the legal status of tokens, the introduction of taxes on trade in cryptocurrencies and the work of crypto instruments, as well as the legal framework of the ICO.
A report was prepared by the Bruegel think tank for the summit participants on the state of cryptocurrencies in Europe. It specializes in economic research and has previously carried out orders for crypto assets for other E.U. authorities, in particular, the European Parliament.
The main theses of the report allow us to understand the direction in which the discussion took place.
ICOs for European companies should be monitored and evaluated by a state regulator. 30 percent of all ICOs in the world are projects registered in the countries of the European Union. Almost half of them fall in Estonia and Great Britain, followed by Lithuania, Germany, and Spain. In addition to general rules, the regulator must determine the type of tokens as either "utility tokens" or "security tokens." At present, the utility tokens do not have a legal status, nor is the taxation system clear.
Cryptocurrency exchanges and crypto wallets must comply with AML rules. The European Central Bank believes that crypto exchanges must comply with the strict rules of the European financial system. So, at the present time, all regulators of the E.U. countries issue permits for the opening of new crypto exchanges.
Total isolation of crypto assets from the general economy is undesirable since it can lead to a lack of financing in the market of blockchain companies, and therefore harm growth. The general regulation of cryptocurrencies can interfere with the innovative process of blockchain companies. Instead, it is possible to regulate activities that link cryptocurrencies to the main financial system.
It is possible to regulate cryptocurrencies as high-risk financial assets. Probably, it is time to raise the level of information disclosure when buying cryptocurrencies by E.U. citizens on crypto exchanges to the level that operates on ordinary exchanges when buying high-risk securities.
Restrictions on trade with cryptocurrencies related to KYC and AML laws are effective in international efforts. Therefore, in these matters, the E.U. should rely on international organizations, such as the Financial Stability Board for the organization of the G20 countries and the G20 itself. International standards are required for cryptocurrency solutions and compatibility with different jurisdictions. The International Organization for Standardization can play a positive role in this.
Today, cryptocurrencies are regulated in Europe both at the national level and by all European authorities, and sometimes in different directions. In the common European market, it is necessary to appoint a single authority responsible for regulating the crypto asset market. So far, as an experiment, different national regulations (including soft ones, like in Malta) can remain in force to understand what measures will be most acceptable.
Politicians should not argue about whether it is necessary to appoint a single regulator for the market of cryptocurrencies in the European Union, but about when is the right time to do it.
Blockchain systems can be resistant to errors, hacking, and fraud, but even the strongest of them can slack. There should be external mechanisms for resolving conflict situations. It is impossible to be limited only by an expert estimation of the program code that is applied now.
The meeting in Vienna did not become a platform for decision making, but it fulfilled its role as the search for consensus. And the financial authorities of Europe, apparently, are increasingly accustomed to the existence of cryptocurrency.
"The E.U. will be acting carefully in this area," Bloomberg quoted the Minister of Finance of Ireland, while he was speaking at a press conference after the event. "It’s obvious that we shouldn’t wait too long with that," as the head of the German Ministry of Finance, the main member of the "European family," hastened him.
The position of the European bureaucracy following the results of the summit is reflected in the speech of European Commission Vice-President Valdis Dombrovskis, delivered at the same press conference. "In our opinion, crypto assets will remain. Despite turbulence, the market continues to grow," he said.
The official added that the European Commission, together with the financial supervisory authorities of the E.U., is already preparing a "roadmap" for the introduction of a unified regulation for cryptocurrencies. The document, in particular, should determine how crypto assets will be classified and how existing E.U. legislation will apply to them.
Thus, Dombrovskis confirmed the move to create a common legal framework for cryptocurrencies throughout the E.U., which, most likely, will also have a single regulator.
Dombrovskis repeated the Bruegel thesis that the E.U. will be guided by decisions made by the FSB and G20 concerning KYC and AML regulation of "digital assets." The FSB should submit its proposals on this issue by October.