The ever-evolving cryptocurrency boom is taking the world by storm, but regulators are grasping at straws as they struggle to keep up. Despite high-strung rhetoric, the EU has made very little progress in creating a viable approach to detailing a regulatory framework for cryptocurrencies – as both a tool and growth sector. Showing just how pressing the need for addressing this shortfall really is, major European cryptocurrency brokers are now calling on Brussels to pass transparent and fair regulation sooner rather than later. This would be a crucial step to make the technology more enticing to institutional investors, rid it of its image as a tool for illegal activities, and unleash its full potential.
On top of the list of regulatory priorities for Europe’s cryptocurrency brokers are “know your customer” (KYC) rules, which firms say will enable trading platforms to go mainstream, gain clients and open the door to investors. That is because in many countries, cryptocurrencies like Bitcoin can be purchased from specialised cash machines without showing any ID. Hence bitcoin users, who use the currency to acquire anything from luxury goods to property, leave no trace whatsoever of their identity – a risky state of affairs that brokers fear will end up determining the rules of the game for policy-makers unless EU authorities act fast.
The frustration of cryptocurrency players is increasingly palpable, given that G20 countries are unable to articulate any consensus to regulate the sector – as was demonstrated at the G20 summit in Argentina earlier this year. The EU, which has vowed to go at it alone, has tabled a proposal requiring cryptocurrency platforms to conduct proper due diligence on customers, and formally report suspicious transactions. But that proposal is still in draft form and it’s unclear when it will clear all the bureaucratic hurdles the European decision-making process entails.
That’s a shame as governmental foot-dragging already has real and harmful consequences. Impatient about the persistent uncertainty about how to handle cryptocurrencies, banks in the UK and US have decided to err on the side of caution and have blocked customers’ access to crypto funds. This means that customers are unable to access certain funds or have no way of depositing crypto-funds into formal bank accounts. At the same time, this forced cryptocurrency exchanges and hedge funds to halt operations, leaving investors high and dry. The reasoning behind the banks’ decision to lock themselves out of the cryptosphere is simple: they cannot guarantee the legality of the funds and fear putting their own business in danger.
EU member states face similar pressures but lacking guidance from Brussels, have made attempts at more constructive regulatory steps. But more often than not, they miss the broader picture. Take “tokens” marketed to investors in initial coin offerings (ICOs) and the question whether they are legitimate financial instruments. In March, the German Federal Financial Supervisory Authority (Bafin) published a long-anticipated advisory letter declaring that whether tokens are financial instruments will be decided on a case-by-case basis. Though much anticipated, the document fails to bring order to the complex crypto landscape.
Similarly, Spain plans to make crypto a major part of its economy and has recently boasted that it has started implementing “Europe’s safest framework to invest in ICOs.” Yet again, the lack of specifics relegates this initiative to no more than buzz-word filled window dressing.
A third way is required to reconcile the need for regulation with industry demands. Despite the sluggishness of the rest of the European bloc, Malta may have found a way. The tiny EU state is writing focused rules to create much-needed predictability to both exchange owners and cryptocurrency users. These rules are already quite comprehensive, covering how brokerages, asset managers, exchanges and traders operate. Malta’s cabinet approved three bills in April, the most significant one being the Virtual Financial Assets Bill. When passed, the Bill would be the EU’s first regulatory framework for cryptocurrencies and ICOs. According to Parliamentary Secretary for Financial Services, Digital Economy and Innovation, Silvio Schembri, the laws will make banks “less reluctant to welcome companies working in the industry” owing to “the legal certainty it would provide.”
As such, the country has demonstrated its ambition to advance crypto through legal design, but these bills are only some of the newest initiatives in that area. The Malta Gaming Authority (MGA) recently published guidelines regarding the application of blockchain and cryptocurrency applications in the gaming sector, a major economic engine of the country. The guidelines are part of a wider “sandbox test” underway since late last year designed to test cryptocurrency controls before allowing online gambling operators to accept digital currencies.
The response from the wider cryptocurrency community has been immediate, with two of the largest cryptocurrency exchanges planning to make Malta a central hub of future operations. Most importantly, the Maltese experience with its regulatory environment could well be an inspiration for the EU and the bloc would be short-sighted to delay any further. Because even if the EU at large dithers, one thing is certain – the nature of the crypto-beast is speed and adaptability and in order to prevent it from setting the rules for European policy-makers before they can do so, the bloc must put its proverbial money where its mouth is. Only then can cryptocurrencies realise their full potential.
