COVID-19 – A Catalyst For Digital Assets And Crypto Trading Regulation? – Technology – European Union – Mondaq News Alerts



European Union:

COVID-19 – A Catalyst For Digital Assets And Crypto Trading Regulation?


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The economic impact caused by the COVID-19 pandemic has
not only significantly changed the way we work, travel and shop,
but has sent a large number of investors on the search for assets
that can provide a safe haven during the ongoing crisis and its
macroeconomic events.

Worldwide shrinking GDPs, global economic slowdowns, countless
governmental rescue packages and fiscal incentives, only
strengthened the desire for inflation resistant hedges amongst
investors.

For centuries, precious metals such as gold and silver have been
one of the safest investments one could make in any crisis. For
this reason, many investors started buying gold during the COVID-19
pandemic as well. However, with borders shut, logistical problems
arose for buying gold, forcing many investors to look for other
alternatives. As in previous crises, investors turned increasingly
to digital assets like Bitcoin. As with any asset class, digital
assets where initially hit by the COVID-19 pandemic and dropped in
price significantly, but digital assets surged in price in no time
as investors started increasingly investing in digital assets and
more people started looking at this emerging technology. Not only
did the COVID-19 pandemic make small investors increasingly
interested in digital assets, but for the first time since the
financial crisis in 2008, institutional investors became open to
crypto investments pouring hundreds of millions into the industry.
So much so that experts started referring to digital assets, in
particular Bitcoin, as the new gold. It is unquestionably an
interesting time for the development of blockchain technology. At
the same time the rising demand and interest in digital assets only
intensify the call for more security and clarity in crypto
regulation on a European level.

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A potential EU framework for crypto assets

At least since the speech of Ursula von der Leyen,
president-elect of the European Commission to the European
Parliament, in November 2019, the EU has finally recognised the
importance and necessity of an EU-wide regulation of crypto
assets.

Since then, the EU Commission has launched a consultation for an
EU-wide framework for crypto assets. The consultation ended in
March 2020 and showed great interest (received feedback from close
to 200 industry experts) in the regulation of crypto assets. As the
EU Commission’s Inception Impact Assessment paper shows, the
Commission focuses mainly on three types of crypto assets:

  • crypto assets that fall within the scope of existing EU
    financial services legislation (e.g. MIFID II, Prospectus
    Regulation and the Central Security Depositary Regulation);

  • crypto assets that fall outside of the scope of existing EU
    financial services legislation (e.g. non-security assets such as
    Utility tokens); and

  • so called “Stablecoins” the main purpose of which is
    generally to reflect the value of an underlying asset.

For crypto assets that fall within the scope of existing EU
financial services legislation, the aim is to provide clarity on
how the existing framework applies to such assets and to make sure
that it is adequate for the purpose. Furthermore, the operational
risks associated with such technologies shall be effectively
regulated (e.g. cyber-resilience).

For crypto assets that fall outside the scope of existing EU
financial services legislation the aim is to protect consumers from
operational risks and fraud and create a framework that provides
sufficient consumer and investor protection allowing crypto assets
to officially become a new asset class for investments by EU
citizens.

“The rising demand and interest in digital assets only
intensify the call for more security and clarity in crypto
regulation on a European level.”

In order to implement the planned changes, the EU Commission
intends to make use of non-legislative measures such as guidelines,
as well as targeted legislative changes to the existing regulations
and tailor-made new measures, including the creation of a new
market infrastructure for trading and settlement of crypto
assets.

On 24 September 2020, the European Commission adopted an
expansive new Digital Finance Package that will transform the
European Economy in the following years to come. Importantly, the
new regulatory framework also includes the announced comprehensive
legislative proposal on cryptoassets not covered by existing EU
financial services legislation (eg, the Markets in Financial
Instruments Directive (MiFID) II (2014/65/EU), E-Money Directive
and PSD II), called Markets in Crypto-assets (MiCA). MiCA’s
main aim is to help streamline distributed ledger technology and
virtual asset regulation on an EU-wide level while simultaneously
protecting its users and investors.

Accordingly, with the above MICA will regulate 3 subcategories
of crypto assets, namely:

  • Utility tokens, which are issued without any financial purpose
    and are intended to provide access digitally to applications,
    services or resources available on a distributed ledger and that
    are accepted only by the issuer of that token to grant access to
    such application, services or resources available;

  • Asset-referenced tokens, whose main purpose is to be used as a
    means of exchange and that purports to maintain a stable value by
    referring to the value of several fiat currencies, one or several
    commodities or several crypt-assets, or a combination of such
    assets;

  • e-money tokens, whose main purpose is to be used as a means of
    exchange and that purports to maintain a stable value by being
    denominated in (units of) a fiat currency.

Beyond that the proposal provides for a number of provisions
concerning entities engaging in the issuance of crypto assets and
services related to crypto assets in the union.

In our opinion this ultimately means that blockchain technology
and crypto assets have come to stay. It is now only a question of
time until there is a harmonised EU crypto regulation in place,
allowing the market to mature. We at Schoenherr constantly follow
the developments and will inform you as soon as new results are
available.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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