The public consultation which started in December will continue until March 19, 2020, with the finalized proposal expected in the third quarter.
The European Commission is gathering feedback from EU citizens, businesses, regulators and other interested parties to establish a regulatory framework for crypto assets and markets on a European level.
The legislative process in the European Union can be long and complicated – initiatives, roadmaps, assessments, and discussions must take into account various and diverse interests. The common market needs a common regulatory framework with investors, companies, customers and regulators speaking the same language, which takes time as stakeholders have already learned.
EU Legislative Process for Crypto Assets in Progress
The European Commission has the right of legislative initiative in the EU. The process of planning and preparing a new law or policy involves putting out a roadmap that describes the problem, sets out objectives, outlines policy options, and defines the scope of the proposed legal framework.
A more detailed inception impact assessment replaces the roadmap when the potential impact of the legislation is significant. Citizens, businesses, civil society and public authorities are invited to express opinions about the proposal before it’s finalized.
The lack of regulatory clarity and legal certainty in the crypto space is what prompted the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (Fisma) to launch an initiative for the adoption of a European regulatory framework for crypto assets and related financial services. Initiating and implementing the EU policy in the area of banking and finance is the DG’s main responsibility.
European Commission Issues Inception Impact Assessment of Crypto Regulation
Fisma published an inception impact assessment in December to inform citizens and interested parties about the Commission’s plans that will result in a legislative proposal. The directorate is seeking their feedback on the initiative as well as their views on its understanding of the problem. The assessment will also serve as an opportunity to identify crypto assets and related services that are not covered by EU’s Fifth Anti-Money Laundering Directive to provide the basis for future amendments to AMLD5 taking into account the latest recommendations of the Financial Action Task Force (FATF).
The move comes after the Commission adopted a Fintech Action Plan in March 2018 mandating the European Securities and Market Authorities (ESMA) and the European Banking Authority (EBA) to assess the suitability of the current EU legislation to crypto assets and initial coin offerings (ICOs). On their advice received in January 2019, the EC is now working in two directions: assessing the applicability of the existing framework for those digital coins that qualify as financial instruments and establishing if a new regulatory approach is needed for the rest. A letter by EC President Ursula von der Leyen to Fisma Commissioner and Vice-President Valdis Dombrovskis describes the task in a sentence:
Ensure a common approach with Member States on cryptocurrencies to ensure we understand how to make the most of the opportunities they create and address the new risks they pose.
There is no definition of crypto assets in the EU at the moment, the directorate notes. It’s unclear how existing regulations apply and the absence of dedicated rules leaves consumers and investors exposed to risks. Stablecoins could pose additional challenges, in terms of monetary policy and sovereignty, due to their capacity to be an alternative to fiat currency. The lack of legal certainty, according to Fisma, is a major hurdle to the development of a sustainable crypto asset ecosystem. Furthermore, national regulatory regimes implemented by some member states can make the cross-border provision of crypto-related services difficult, the directorate remarks.
Regulatory Proposal Expected in Third Quarter
The European Commission has so far received feedback from several organizations. The Spanish Bolsas y Mercados Españoles (BME), which integrates companies operating securities markets and developing blockchain solutions for them, welcomes the Fisma initiative. It has expressed its views regarding several aspects such as the definition of crypto assets and the financial market infrastructure supporting innovation. The Belgium-based European Savings and Retail Banking Group (ESBG) insists on implementing a licensing regime for crypto service providers and a set of rules to protect ordinary consumers and investors.
Two Italian entities have also shared their opinions. According to Links Foundation, the deflationary nature of crypto assets may help the European society to migrate from a debt-based economy while Digital Ledger Technologies (DLTs) can raise trust in the financial sector and introduce “shorter value chains with fairer remuneration logic.”
The research institution calls for reducing the difficulty for startups dealing with crypto assets to open traditional bank accounts, promoting access to crypto assets without requiring accredited investor status, and facilitating the payment of wages in cryptocurrencies. A small consultancy firm operating in the sector, Coinlex, stresses the need for a European crypto directive to avoid fragmentary national regulations.
The public consultation on the initiative was launched on Dec. 19, 2019 and will continue until March 19, 2020. The European Commission expects more feedback and alternative views on all aspects of the initiative from citizens, blockchain experts, market participants such as crypto exchanges and wallet providers, representatives of the traditional financial sector and fintech startups, member states and competent national authorities.
They can contribute to the consultation by filling in an online questionnaire after registering with the EU’s Transparency Register. The finalized regulatory proposal is expected in the third quarter of 2020.