EU Cryptocurrency Regulation: A Unified Era - Past and Future

Gita1999

"As one of the world's largest economies, the European Union (EU) plays a crucial role in demonstrating and leading cryptocurrency regulatory policies. Studying the historical development and future trends of cryptocurrency market regulations in the EU is of great theoretical and practical significance. It helps understand the legislative thinking and practical experience of the EU in this field, analyze different regulatory models and their effects in various countries globally, and explore future strategies for cryptocurrency regulation.
This article analyzes the historical evolution and future development direction of the EU's cryptocurrency regulations, including the recognition of cryptocurrency nature, regulatory policies (exchange regulatory systems, licensing systems, tax policies, etc.), in order to provide reference and insights for policy makers.
1. How the EU Improved the Cryptocurrency Definition Framework
1.1 Initial Regulation (2014)
As early as 2014, the European Central Bank (ECB) released a report clarifying what cryptocurrencies are: ""digital tokens not issued or supported by central authorities or public institutions, with their value determined by market supply and demand, and capable of peer-to-peer transactions via specific network protocols."" This was the EU's first formal assessment of cryptocurrencies, laying the foundation for subsequent regulatory policies.
1.2 Challenges of Terrorism and Supranational Currency (2015-2019)
1.2.1 The EU's Fifth Anti-Money Laundering Directive (5AMLD)
On the evening of November 13, 2015, a series of terrorist attacks occurred at seven locations in central Paris and its suburbs, marking the most serious acts of violence in France since World War II and the deadliest terrorist attacks in Europe since the 2004 Madrid train bombings. Similar terrorist attacks took place in Brussels in March 2016. These two disasters exposed the vulnerabilities of the EU's Fourth Anti-Money Laundering Directive (4AMLD), particularly its neglect of the risks associated with cryptocurrency and other financing channels.
To strengthen the fight against money laundering and terrorist financing, in 2016, the European Commission proposed a series of legislative proposals, including the 5AMLD. Subsequently, the 5AMLD was passed by the European Parliament and the Council in May 2018 and came into effect in January 2020. It aimed to enhance the transparency of financial transactions to combat money laundering and terrorist financing. One of the main provisions of the 5AMLD is that virtual currency exchange platforms and wallet providers are considered ""obliged entities"" and subject to EU regulations. This means they must comply with the same regulatory requirements as banks and other financial institutions, including conducting customer due diligence, monitoring virtual currency transactions, and reporting suspicious activities to authorities.
However, because the 5AMLD falls under the category of ""directive"" in EU law, it does not have direct applicability and requires member states to amend their domestic laws for implementation. Therefore, while the 5AMLD brought cryptocurrency service providers under regulatory scrutiny, it did not establish a unified legal framework. As a result, EU member states have different definitions, classifications, and regulations for cryptocurrencies, hindering cross-border regulatory cooperation.
1.2.2 The Challenge of Diem
Diem stablecoin was proposed by Facebook in June 2019 as a global payment project. Unlike typical cryptocurrencies, Diem relies on Facebook's global user base of 2 billion and is backed by a basket of currencies, potentially challenging financial sovereignty and stability. Given that Diem's operations are based in Geneva, Switzerland, its impact on EU financial stability, monetary sovereignty, and consumer rights has raised concerns among EU experts and institutions.
Existing regulatory frameworks, including 5AMLD, were not designed to effectively address ""supranational currencies"" like Diem, and the loose definitions of cryptocurrencies posed challenges for cross-jurisdictional regulation. A new cryptocurrency definition framework was urgently needed.
1.3 MiCA's Cryptocurrency Definition Framework (2020 to Present)
Under the pressure of cross-border regulation and the direct stimulus of Diem, the European Commission proposed the draft ""Markets in Crypto-assets Regulation (MiCA)"" in 2020, categorizing cryptocurrencies into three groups to standardize regulation across EU member states. These categories are Electronic Money Tokens (EMT), Asset-Referenced Tokens (ART), and other crypto-assets, excluding asset-referenced tokens and e-money tokens. The draft has been approved by the European Parliament and is expected to come into effect in 2024.
Electronic Money Tokens: Cryptocurrencies pegged to a single fiat currency, designed as electronic substitutes for cash, used for payments or transfers. For example, cryptocurrencies pegged to the Euro fall into this category.
Asset-Referenced Tokens: Cryptocurrencies pegged to multiple fiat currencies or other assets, designed to maintain stable value. These are commonly known as stablecoins.
Other Crypto-assets: Any cryptocurrency or utility token that does not fall into the first two categories, including most cryptocurrencies like Bitcoin and Ethereum.
According to MiCA's classification, stablecoins like Diem fall under EMT or ART and must adhere to stricter regulatory requirements, such as whitepaper approval, reserve management, liquidity assurance, and information disclosure. However, MiCA does not cover crypto-assets like DeFi, NFTs, and security tokens that meet the conditions of other regulated instruments.
2. Historical Evolution of Key EU Regulatory Policies
After reviewing the development of the EU's cryptocurrency definition, let's examine the historical evolution of its key regulatory policies. These regulatory policies are generally based on the cryptocurrency definition framework, and the time periods are similar.
2.1 Initial Exploration (2014)
2014 was the ""year of cryptocurrency regulation"" in the EU. Before this, the EU did not have specialized regulatory rules for cryptocurrency exchanges; instead, there were some general financial laws and directives applicable, such as the Fourth Anti-Money Laundering Directive (AMLD4). Whether these financial laws applied to cryptocurrency exchanges was uncertain.
2.2 Initial Integrated Regulation (2015-2019)
In 2015, the European Court ruled on whether Bitcoin transactions should be subject to value-added tax (VAT). It determined that Bitcoin payments constitute a service and are subject to VAT, but it also found that exchanges between cryptocurrency and fiat currency are VAT-exempt under the EU VAT Directive. This ruling provided some tax advantages for cryptocurrency exchanges operating in the EU.
In 2018, AMLD5 brought cryptocurrency exchanges under the scope of anti-money laundering and counter-terrorist financing regulations. It required them to perform customer identity verification, record transaction information, report suspicious activities, and more. This imposed compliance requirements on cryptocurrency exchanges operating in the EU. That same year, the European Central Bank issued opinions recommending the EU establish a unified regulatory framework for crypto-assets to address their potential impact on financial stability, consumer protection, and market integrity. This guidance played a role in shaping MiCA.
During this stage, several important judicial and legislative actions marked the EU's initial efforts to regulate cryptocurrency assets. However, the EU had not yet formed a unified and comprehensive regulatory framework.
2.3 MiCA's Unified Regulatory Framework (2020 to Present)
The upcoming MiCA introduces specific regulatory standards for entities providing cryptocurrency services, including exchange services. It requires these entities to obtain licenses, register, disclose information, and adhere to conduct standards. Additionally, it assigns regulatory functions to the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). MiCA will provide a clear and consistent regulatory framework for cryptocurrency exchanges within the EU and have"