How the EU intends to control the crypto market

The history of cryptocurrencies is also a history of scandals. The damages of the OneCoin pyramid scheme, which was revealed in 2017, amounted to four billion dollars. The founder, the German Ruja Ignatova, has gone underground and is now on the FBI’s list of the ten most wanted criminals. In the Bitconnect case, investors who deposited their bitcoins there were promised fantastic profits of around one percent per day. In the best case, the effort would have doubled in 120 days. With such rich promises, Bitconnect briefly made the top 20 cryptocurrencies before the bubble burst in 2018. Damages are estimated at one billion dollars. Crypto exchange Mt.Gox, once the world’s largest trading platform for Bitcoins, which went bankrupt in 2014, also has haunting memories. Hackers reportedly made off with 650,000 Bitcoins there, but internal manipulations also played a role.

In addition, over the years there have been hundreds of larger or smaller free riders who fled from investors with the prospect of quick money – also in this country. In the previous year, 55 percent of all cases of fraud reported to the Austrian financial market authority FMA were related to cryptocurrencies and other forms of digital investment. The current price losses on Bitcoin & Co cloud the climate for fraudsters, but there are always new cases. On October 19, 2022, the FMA published the latest investor warning about “Happy Coins”.

A positive signal for the industry

The EU now wants to put an end to such incidents in the Wild West. Similar to the regulation for insurance and securities, the crypto scene must now operate under the same strict requirements throughout Europe through an EU regulation called MiCA (“Markets in Crypto-Assets”). After two years of heated debates, the MiCA rules were approved by the EU Council of Ministers at the beginning of October 2022 and are scheduled to enter into force in 2024. Raphael Schön, author of the Reclam book “Bitcoin. 100 Seiten”, which will be published in November: “Generally, the EU regulation is a positive signal for the industry. Established companies, which often already have national concessions, are strengthened. Newer, partly questionable providers will have a harder time.”

One of the key MiCA provisions to protect consumers is that crypto platforms must be held accountable for the assets deposited with them, and these balances will be allocated directly to customers. So far, many platforms have worked with collective repositories. Bitcoins, for example, are then stored there by many customers together. It can be compared to a large safe where the bank stores all its customers’ gold assets. At the latest, when a safe cracker takes away some of the gold coins and bars, it is unclear who is actually damaged and to what extent. The same goes for many cryptoassets that are in a safe of sorts for everyone.

Oliver Völkel, a Viennese lawyer specializing in cryptocurrency, explains the situation: “If, for example, 20 percent of bitcoins disappear through hackers, each customer’s stock may be reduced by the same percent. The exchanges cannot continue like this, legal certainty is needed.” In the future, a customer’s crypto assets must be in their own “lockers”. Lawyer Völkel: “Since the crypto-platforms will also be responsible for losses caused by hackers in the future, this must also be guaranteed. MiCA does not prescribe anything specific. A corresponding equity or taking out insurance is conceivable.” However, it is doubtful whether the insurance will bear the risk at all, and if so, at what price.

Suspected cases of money laundering are increasing

Robert Supnig, money laundering officer at the Graz-based bitcoin broker Coinfinity: “We avoid such problems from the start and do not offer a custody solution for security reasons. All our customers have their own wallets, we only advise how it works. big advantage of bitcoin is that it is decentralized. Why does it need to be stored centrally?” Like all other providers, Coinfinity is very much affected by the stricter money laundering rules that will be introduced as part of MiCA: “In the future, we will have to exchange data with another exchange know both the name of the sender and the name of the recipient.” At best, transactions directly between two customers can then still be carried out anonymously. By the way, the Austrian crypto providers already report numerous suspected cases of money laundering – in 2021 there were at least 250. The Federal Criminal Police in Vienna admits that the crypto scene has approached the level of care of the banks. Finally, like banks, crypto companies face stiff penalties for breaking the rules. For comparison: Notaries, who often handle large real estate transactions carried out with money suitcases, sounded the alarm just 17 times.

As an additional security feature, MiCA requires every issuer of a digital currency to prepare a prospectus. Similar to a securities prospectus, it must then be explained exactly who is behind the product, how it works and what the risks are. However, MiCA is less aimed at the crypto industry, according to lawyer Völkel: “MiCA was primarily created for classic banks that could issue value-linked digital tokens on everything from stocks to gold and e-money in the future.” Thanks to the rules that apply across the Union, EU-wide distribution is not a problem. So-called stablecoins, which are linked one-to-one to a currency such as the euro, must then be regulated more strictly. In the future, stablecoins should have an additional two percent surplus reserve for crises, which is far above what is currently the case.

The question remains how powerful MiCA is. One must fear that providers will register in places where supervision is considered to be particularly lax. However, with this approval in receiving states, EU-wide distribution is possible without problems. In the case of the banks, for example, it quickly became clear that the national supervisory authorities did not always look closely at domestic institutions. Therefore, the 110 largest EU financial institutions are now controlled by the European Central Bank ECB.

Difficult implementation

It is also clear that the MiCA system primarily includes EU providers. Lawyer Völkel: “The supervisory authorities in the EU above all have warning messages as a real weapon if, for example, a questionable cryptocurrency from the United States is actively courting customers in the EU.” There are also doubts about the new prospectus requirement for virtually all cryptocurrencies: how many investors will bother to read these documents carefully? For many investors, the fact that a digital currency has just started to rise is probably a buying argument. Additionally, Bitcoin of all things should be exempt from this prospectus requirement as there is no issuer ie. no official operator.

“I think there will still be cases of fraud, even in times of MiCA,” says book author Schön. After all, there are always new scams in the classic investment area: “And if there is a hype for cryptos again at some point, the most absurd offers will come again. After the surprising success of dogecoins, originally intended as a joke currency, dozens of new dog coins suddenly appeared thrown into the market.” And: Even the market leader Bitcoin is not risk-free. Schön: “You can’t know if Bitcoin will still exist in 20 years. Personally, I think so, but there is no guarantee. There have also been attempts to ban private ownership of gold.”

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