Recent Developments in Crypto Regulation in the EU and the USA in 2023

The year 2023 will be remembered as a tumultuous period for cryptocurrency investors. While the market faced challenges, such as the overall cryptocurrency market cap contraction, Ethereum’s depreciation, and a decline in total value invested in decentralized finance (DeFi), it also witnessed significant progress. Among these advancements, notable developments include continued institutional adoption, a growing interest in layer 2 solutions, and, most importantly, significant changes in cryptocurrency regulation. This article will specifically explore the recent developments in cryptocurrency regulation within the EU and on a global scale. Let’s take a closer look.

MiCA Regulation Adopted in the European crypto Space

In June 2023, the MiCA regulation (Markets in Crypto Assets Regulation) was adopted. This is the first European regulatory framework for cryptocurrencies. It directly applies to market participants without the need for national transposition, superseding the laws of EU member states.

The MiCA regulation includes provisions for three entities: stablecoin issuers, cryptocurrency issuers (e.g., Ether and Bitcoin), and crypto service providers.

The MiCA regulation requires issuers to publish a detailed white paper and notify regulators. As for crypto service providers, it requires them to be licensed and headquartered in Europe.

This obligation applies to both European and non-European crypto companies operating for EU customers. While it will be phased in gradually from June 30, 2024, subsequent revisions and updates are to be expected. The MiCA regulation has, in fact, failed to provide details on certain crypto activities, such as cryptocurrency lending, for example.

Law on the Traceability of Cryptocurrency Transfers in the EU

At the same time as the MiCA regulation, the European Council adopted a revision of the 2015 remittance regulation. This revised version, which complements the MiCA law, provides for cryptocurrency transfers to be traced in the same way as fiat transfers. It also strengthens consumer protection against financial crime and market manipulation.

The regulation introduces two obligations for crypto service providers. They must collect and make accessible all information relating to the originators and beneficiaries of the crypto transfers they carry out, whatever the amount.

The law also specifies the various items of information that crypto service providers must obtain from their customers before carrying out crypto transfers. Finally, it is planned that the largest crypto service providers will publish a public report on their energy consumption. The aim is to reduce the ecological impact of cryptocurrencies. Like MiCA, this law too will come into force gradually from 2024.

The Administrative Cooperation Directive (ACD8) in the EU

In 2023, the EU’s ambition to regulate the crypto sector was not limited to the MiCA law and the revision of the law on fund transfers. On September 13, 2023, the European Parliament adopted the DAC8 directive, which marks a turning point in European crypto regulation.

Adding to existing crypto regulations, it requires crypto service providers to report all crypto transactions to the tax authorities. The tax authorities will be able to automatically exchange this information with each other. Although these laws appear to be a threat to the adoption of cryptocurrencies, they give the EU a considerable head start over the USA.

Regulatory advances in the UK

While the MiCA regulation facilitates crypto activity in the EU, the UK didn’t want to be left completely behind. In June 2023, the country enacted the Financial Services and Markets Act (FSMA). This replaces legislation inherited from the EU and introduces new chapters on crypto assets.

According to the timetable, it is expected to be soon extended to crypto exchanges, crypto mining and other crypto activities. This regulatory initiative testifies to the UK government’s desire to confer legitimacy on cryptocurrencies and provide a favorable framework for their development in the country.

Is the USA Still Lagging Behind on the Issue of Crypto Regulation?

In the USA, 2023 was marked by the recognition of stablecoins as a form of currency. Whatever one may say, this is a significant step forward for the US crypto ecosystem in general.

However, to this day, there is no legal document in the United States that specifies when a cryptocurrency can be considered a security. As a result, crypto exchanges regularly come under heavy attack from regulators (SEC and CFTC) trying to regulate by sanction.

Fortunately, the SEC is beginning to suffer defeats in the courts, which recently seem to be deliberating in favor of cryptocurrencies. In June, Republicans had to propose a bill on the delimitation of powers between the SEC and the CFTC.

The lack of regulatory clarity around cryptocurrencies also encourages the misuse of cryptocurrencies, often condemned by the media and anti-crypto politicians. On October 19, 2023, for example, the Financial Crimes Enforcement Network (FinCen), a division of the US Treasury, proposed legislation targeting crypto mixers.

FinCen proposed imposing record-keeping and transaction-reporting requirements on crypto mixers to preserve national security. It explained that the measure was necessary to combat, among other things, the use of cryptocurrencies to fund terrorist organizations.

The initiative draws on recent rumors of the use of cryptocurrencies in funding the Hamas terrorist attack on Israel. It also appears to have similarities with the Remittance Act and DCA8, all passed this year in Europe.

Clearly, the USA is seriously lagging behind in the development of clear and precise crypto regulations. This affects the viability of crypto exchanges and limits innovation in the sector. For a country considered the global hub of crypto and Web3 innovation, the USA still has a long way to go. We look forward to the country resolving this issue in 2024, so as not to impede innovation.