Europe Sets The Pace On Digital Asset Regulation

EU’s new MiCA legislation seeks to protect investors and provide clear rules for crypto firms

European Parliament, Strasbourg

Compiled by the Oliver Wyman Forum

The European Union adopted comprehensive legislation aimed at fostering innovation and investor protection in cryptoasset markets while US lawmakers, regulators, and industry participants remained divided on the best approach to take toward the sector. These are among the notable recent developments in the future of money.

Policy Front

EU Enacts Landmark Crypto Legislation

The European Union became the first major jurisdiction to pass comprehensive cryptoassets legislation on April 20, 2023, when the European Parliament (EP) overwhelmingly approved the Markets in Crypto-assets, or MiCA, regulation.

The law sets common rules for service providers across the 27 EU member states. It requires anyone seeking to offer a cryptoasset to publish a white paper containing information about the issuer, the reason for raising capital, any rights or obligations attached to the asset, the technology that underpins it, and the potential risks associated with investing in it. The law also requires stablecoin issuers to maintain reserves that are segregated from their own assets and invested in low-risk ways.

The parliament also passed a separate law requiring that transfers of Bitcoin and other cryptoassets be traceable in the same way that conventional money transfers to curb money laundering and other illicit are so that suspicious transfers can be blocked.

The legislation “puts the EU at the forefront of the token economy,” Stefan Berger, a German EP member who led negotiations on the law, said in a statement. "Consumers will be protected against deception and fraud, and the sector that was damaged by the FTX collapse can regain trust."

Industry executives generally welcomed the legislation, which will take effect in stages over the next 12 to 18 months. “Regulation by enforcement like in the US is not a solution,” Decrypt quoted Monty Metzger, CEO of Liechtenstein-based exchange LCX, as saying. “We need rules and guidelines to let technology innovation happen.”

Gensler Takes Heat Over SEC’s Approach To Crypto

The chair of the US Securities and Exchange Commission (SEC), Gary Gensler, defended the agency’s approach to regulating cryptocurrency markets during a contentious hearing before the House Financial Services Committee on April 18, saying he had never seen an industry so routinely break securities laws.

Gensler said existing US securities laws are clear and the SEC has begun explaining in rule proposals how its regulations would apply to crypto, but many firms don’t want to comply. “It’s not a matter of lack of clarity,” he said.

Several Republican committee members adopted the language of the SEC’s industry critics and complained that the agency was conducting regulation by enforcement. “You’re punishing digital-asset firms for allegedly not adhering to the law when they don’t know it will apply to them,” said Patrick McHenry, the committee chair.

New US Effort To Regulate Stablecoins Meets Resistance

An effort to revive a legislative proposal to regulate stablecoins has revealed new divisions in the US Congress, the Wall Street Journal reported on April 19.

The House Financial Services Committee published a draft bill similar to one that was introduced with bipartisan support last year but not acted upon. It calls for one-to-one reserve backing of any stablecoin, monthly publication of the assets in the reserve portfolio, and naming the Federal Reserve as regulator of non-bank stablecoin issuers.

Democratic members said the House should consider a fresh approach in light of recent turmoil. The bill is “not cognizant of the recent disasters in the crypto space,” said Representative Stephen Lynch. Republican counterpart French Hill said legislation was needed to provide clarity to the market. “Digital-asset developers are leaving the United States to go to countries that have more-established regulatory frameworks,” he said.

UK May Need To Set Limits On Stablecoins, Official Says

Authorities in the United Kingdom may need to impose limits on the use of stablecoins to prevent the risk of financial instability, Bank of England Deputy Governor Sir Jon Cunliffe said in a speech on April 17.

The central bank wants to see competition and innovation in payments but needs to guard against “rapid, disruptive change that does not allow the financial system time to adjust,” he said. Cunliffe also stressed the need to ensure stablecoins are backed by high-quality liquid assets because it will not be possible, at least initially, to provide the kind of insurance against a coin’s failure that bank deposit insurance offers.

Russia Considers Crypto Mining To Finance Trade

The Russian government is planning to allow a limited number of entities to mine cryptocurrencies for use in foreign trade, the Wall Street Journal reported on April 19, citing a TASS news agency report.

Officials are working on legislation to allow cryptocurrencies to be used in export-import deals but continue to believe that they shouldn’t be permitted for domestic trading and payments.

The United States and other G7 nations froze nearly have of Russia’s foreign exchange reserves to protest the country’s invasion of Ukraine in February 2022.

Legal Beat

Coinbase Takes Legal Action To Compel SEC To Provide Regulatory Guidance

After months of sparring with the US Securities and Exchange Commission (SEC), cryptocurrency exchange operator Coinbase Global took legal action on April 24, in an effort to compel the regulator to provide what it called “overdue guidance for the crypto industry.”

The action, a petition filed with the US Court of Appeals for the Third Circuit, centers around complaints by Coinbase and echoed by other crypto firms that the SEC has been pursuing regulation by enforcement action rather than setting out clear steps the industry can take to be compliant with securities laws.

Coinbase filed a petition for rulemaking with the SEC in 2022 urging the agency to provide clarity on the circumstances under which a digital asset is a security and to create a new market structure framework compatible with cryptocurrencies. The SEC hasn’t responded publicly to that petition but it did inform Coinbase in March that it might take enforcement action against the firm because of concerns over its listing of unregistered digital assets and its staking service.

“Regulatory clarity is overdue for our industry,” Coinbase Chief Legal Officer Paul Grewal said in a blogpost explaining the company’s action. “Yet Coinbase and other crypto companies are facing potential regulatory enforcement actions from the SEC, even though we have not been told how the SEC believes the law applies to our business.”

The move comes days after Chief Executive Brian Armstrong said Coinbase might consider leaving the United States if regulators don’t provide a clearer outlook. “Anything is on the table, including relocating or whatever is necessary," he said at a Fintech Week event in London on April 18 after former UK Chancellor George Osborne asked him whether he could see Coinbase leaving the United States. The following day, Coinbase announced it had received a license to operate from the Bermuda Monetary Authority and was pursuing efforts to obtain a license in the United Arab Emirates as part of its international expansion efforts.

SEC Sues Bittrex For Allegedly Violating Securities Laws

The US Securities and Exchange Commission sued Bittrex on April 17 for allegedly operating an illegal securities exchange, broker-dealer, and clearinghouse.

The lawsuit hinges on the argument that Bittrex, once the largest US cryptocurrency exchange, listed assets that qualified as securities and should have been registered with the SEC. Bittrex said it had repeatedly asked for clarity about which assets regulators believed were illegally offered but they refused to do so.

The lawsuit is part of “a larger crusade to drive cryptocurrency out of the United States,” the Wall Street Journal quoted a company spokesman as saying.  In March, Bittrex announced it would shut down its US platform at the end of April.

Bored Apes Backer Wins Trademark Infringement Case

A federal court in California ruled on April 21, 2023, that Yuga Labs’ Bored Ape Yacht Club collection of non-fungible tokens (NFTs) were entitled to trademark protection, and that a series of copycat NFTs violated the company’s rights.

Conceptual artist Ryder Ripps argued his copies of the Bored Apes were “appropriation art” that should be protected under the free speech protections of the US Constitution. He said he intended to draw attention to what he claimed were the Apes’ “racist messaging and imagery.” 

US District Judge John Walter rejected that claim, ruling that the copied NFTs "do not express an idea or point of view” and are “no more artistic than the sale of a counterfeit handbag."