The use of crypto assets or cryptocurrencies and the technology behind them is both promising and problematic. The EU wants to help promote the development and use of these technologies in the EU, while protecting users.
Read more about digital transformation in the EU.
What risks do crypto assets represent?
Part of the appeal of crypto assets is that they do not require a central ledger or institution, allowing for simple and secure transactions between two parties without an intermediary. However, this feature, coupled with the lack of regulation (crypto assets are currently excluded from the scope of European law), poses significant risks.
Risks to consumers, businesses and markets
Users of crypto assets are not covered by European consumer protection rules and are often misinformed about the risks, which can cause them to lose money. The widespread use of unregulated crypto assets can fuel financial instability, market manipulation and financial crime. Since transactions are usually done anonymously, cryptocurrencies are widely used for criminal activities. After the war in Ukraine, EU countries have banned trading crypto assets with Russian entities.
The environmental impact of cryptocurrencies is significant. Indeed, this technology uses enormous amounts of electricity. According to estimates, Bitcoin’s energy consumption is equivalent to that of a small country.
Read more about the Green Deal and EU actions against climate change.
The benefits of the new European cryptocurrency regulation
The EU is currently working on new rules to increase the potential of crypto assets and protect citizens from the threats they pose. MEPs reviewed and amended the Commission’s proposal and decided in March 2022 to negotiate the final form of these rules with EU countries in the Council.
To encourage the development and use of these technologies, the new rules will aim to provide legal certainty, support innovation, protect consumers and investors and ensure financial stability.
The rules cover transparency, disclosure, authorization and supervision of transactions. MEPs want trading in certain “tokens” to be supervised by the European Securities and Markets Authority and the European Banking Authority. Companies using crypto assets need to better inform consumers about the risks, costs and fees they can entail. By regulating public offerings of crypto assets, the rules would ensure financial stability, while other measures tackle market manipulation, money laundering, terrorist financing and other criminal activities.
In front of reduce high carbon footprint cryptocurrencies, MEPs are calling on the Commission to prepare new rules to include any cryptocurrency mining activity that contributes substantially to climate change in the classification system of sustainable activities.
Once MEPs have negotiated the final form of the bill with EU governments, it should be adopted by the European Parliament as a whole and by EU countries.
These new rules are part of a broader digital finance package that supports the EU’s digital transition by encouraging innovation while ensuring consumer protection. In March 2022, Parliament adopted new rules for the pilot project for market infrastructures based on distributed ledger technology, which was adopted by Parliament in March 2022.
In April 2022, Parliament agreed to start negotiations with EU countries on rules that allow the detection and identification of crypto asset transfers, to prevent money laundering, terrorist financing and other crimes.
What are crypto assets, cryptocurrencies, tokens and stablecoins?
The crypto assets are digital assets that can be used as a medium of exchange or for investments. Unlike traditional banking, there is no need for a central ledger – they are based on distributed ledger technology that allows transactions to be securely recorded by a network of computers. They are private and not issued or guaranteed by any central bank or government agency. The term “crypto” denotes security. These currencies are secured with cryptography.
The first crypto assets to emerge were bitcoins, introduced in 2008 as cryptocurrency (alternative payment method for currencies issued by central banks). In 2020, there were 5,600 different cryptocurrencies, with an estimated global value of 250 billion euros. This generation of crypto assets is generally not backed by intrinsic value assets, and their value is often quite volatile, limiting their practical use, making them a form of risky investment rather than a useful currency.
Tokens and stablecoins
Tokens are the latest crypto assets. They are usually issued to raise capital for new entrepreneurial projects or start-ups.
The introduction of new products such as stablecoins (stable digital currencies), which could provide a more stable method of payment because their value is backed by real assets, opens up new opportunities for innovation and wider use.
Read more about what the EU is doing to capitalize on digital opportunities:
– Control artificial intelligence
– European data strategy
– The European Digital Markets Act and the Digital Services Act explained
– Why is cybersecurity important and what is the EU doing about it?