European Parliament releases study proposing new approaches for dealing with crypto gray areas

The research-based document outlines key regulatory concerns around recent, notable developments within the crypto industry, and suggests its preferred policy response to them. Recent crypto developments noted within the report include; mining, the increasing use of cryptocurrency for money laundering & terrorist financing, the growing use of private ‘tokens’ for fundraising, and the emergence of stablecoins & Central bank digital currencies (CBDC’s).

The study differentiates between “lawful” crypto that exists on accessible cryptocurrency exchanges where Crypto assets exist as speculative financial instruments, and, “unlawful” crypto activity that occurs on darker, more hidden sections of the internet.

“Most legal activity in crypto-assets – and in particular in cryptocurrencies – takes place on crypto-exchanges. It relates mostly to the use of cryptocurrencies for speculative purposes. The illegal activity includes, amongst others, the buying and selling of illegal goods or services online in darknet marketplaces, money laundering, evasion of capital controls, payments in ransomware attacks and thefts.”

The policy department outlines its suggested responses for both differentiating between legal and illegal crypto activity, as well as managing the growing use of crypto for illicit purposing by deploying Anti-Money Laundering (AML) and Countering Financing for Terrorism (CFT). _“To create a level playing field and ensure adequate investor protection across the EU,” the report states, “the EU should consider introducing a common view on the legal qualification of crypto-assets as financial instruments.”

“To bring the European AML/CFT framework up to speed with the current reality in the crypto-space, the EU should consider a number of regulatory actions, including broadening the definition of virtual currencies, expanding the list obliged entities to include more crypto-gatekeepers, paying sufficient attention to the role of miners, researching whether decentralised trading facilities effectively pose AML/CFT risks.”

Stablecoins & CBDC’s: In the eye line of European regulators

The report makes a number of considerations around the well established already active stable coin industry, and the Central Bank Digital Currency space which presently only exists tangibly as a few pilot programs. The report notes that while stable coins and CBDC’s have some similarities in utility, they are very different at key fundamental levels;

“Crypto-assets are private assets, CBDCs are sovereign in nature. Secondly, the issuance of crypto-assets relies on the use of DLT or similar technology, the issuance of CBDCs is not contingent upon the use of any specific technology. Thirdly, cryptocurrencies, lack the status of legal currencies, the opposite would be true for CBDCs.”

In terms of policy recommendations, the study specifically recommends that “The EU should be mindful of ongoing research and experiments relating to central bank digital currencies”_ and that _“The EU should align its actions with regard to global stablecoin projects with ongoing work of international standard-setting bodies like the FSB.”

Private token investment: Education & alignment

The other major focus of the report is investigating and addressing growing concerns regulators have surrounding investments in crypto-assets, primarily driven by the Initial coin offering (ICO) fundraising phenomenon during the 2017 bull market.

The study notes that EU regulators find themselves in a difficult position. They will need to inform residents of the risks associated with investing in crypto assets because of the lack of European regulations and protection for investors, however, the policy group is also clear that regulators within the continent, that a number of crypto-assets with specific designs can likely be included within EU financial services.

“Create a level playing field and ensure adequate investor protection across the EU, the EU should consider introducing a common view on the legal qualification of crypto-assets as financial instruments. Moreover, EU financial services laws should be brought up to speed with the unique characteristics of the crypto-sector, to allow for an effective application of existing financial regulation to crypto-assets that are financial instruments.”

The report also recommends making clear documentation available to local traders in order to clarify which crypto assets have adequate features to be manageable under EU financial laws. EU financial laws do not prohibit financial institutions from holding or gaining exposure to crypto-assets or from offering services relating to crypto-assets and the policy department is determined to create standardization around crypto-asset law in the region and prevent jurisdictional arbitrage.