European

What’s next for EU’s crypto industry as European Parliament passes MiCA?

What is the potential impact of MiCA on the EU crypto and blockchain market, and what other regulations can be expected for this rapidly evolving industry?

On April 20, the European Parliament voted to pass the Markets in Crypto-Assets (MiCA) regulation, the European Union’s main legislative proposal to oversee the crypto industry in its member countries. 

The MiCA regulation is a significant development for the crypto industry in the European Union. Prior to MiCA, crypto companies had to comply with 27 different regulatory frameworks across the EU member states, with Germany or France being costly and burdensome, for example.

Under MiCA, however, EU-wide regulations will apply, allowing companies to operate throughout the entire EU crypto market with a MiCA license granted in one country. This will increase the competitiveness of EU startups and may result in them gaining market share from unregulated competitors.

MiCA will increase the EU’s competitiveness

Moreover, MiCA could encourage more institutional adoption and activity in the EU crypto and blockchain market. Patrick Hansen, director of EU strategy and policy at stablecoin issuer Circle, told Cointelegraph that MiCA will enable European crypto firms to scale and grow faster, allowing licensed companies to offer their services throughout the world’s largest single market, with roughly 450 million people:

“The legal clarity will also foster innovation amongst financial institutions that have been previously hesitant to launch products and services due to regulatory uncertainty. Additionally, as MiCA is the first comprehensive regulatory framework for crypto assets from a major jurisdiction in the world, it is likely to attract considerable foreign capital and talent to the region.”

For Moritz Schildt, a board member of the Hanseatic Blockchain Institute and the German Blockchain Association, the biggest advantage of MiCA is that “it will come into force already this year,” giving the EU a chance to provide a unified regulatory framework for crypto assets and related providers.

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Creating a regulatory framework for a technology that sees new developments and outgrowths practically every month and evolves as dynamically as the tokenization of investment opportunities is “very challenging.”

“It should come as no surprise, therefore, that some regulations are not yet optimal and that questions about concrete applications remain unanswered,” Schildt said, adding that with MiCA, Europe has the opportunity to position itself “as a location for innovation and quality.”

Unregulated companies out of the EU crypto market

Peter Grosskopf, co-founder of decentralized finance (DeFi) project Unstoppable Finance, is also convinced that MiCA will benefit the EU crypto and blockchain market. First, companies from outside Europe will have to register with a company in the EU, so there is a “direct impact on job creation and tax payments.”

Second, many jurisdictions take an overly strict approach to regulating crypto. For example, “the U.S. does regulation by enforcement.” Compared with other regions, the EU will become “a safe space for the industry as a whole, and innovators from around the world will start to build their businesses here,” Grosskopf said.

Stefan Berger also noted that the United States is currently cracking down on the crypto sector. According to the German politician and European Union Parliament rapporteur for MiCA, the European crypto asset industry has regulatory clarity that the United States doesn’t, and it would be wise for U.S. lawmakers to take a cue from MiCA:

“For me, the biggest advantage is that we create trust, which is a crucial booster, especially for young technologies like blockchain. I expect regulation to become a global standard-setter over time. A global MiCA would be desirable at some point.”

NFT regulation unavoidable

Through MiCA, European policymakers are trying to create a reliable framework that builds trust through legal certainty. This includes a uniform classification of assets and the requirement for coin issuers to provide a white paper that discloses all relevant information about the coins, such as their energy consumption and environmental impact.

In addition, MiCA will ensure that every new token is reviewed for approval to check that the business model does not threaten the stability of the cryptocurrency, which creates more transparency for investors.

But the crypto and blockchain sector is constantly evolving. “Tokenization is not hype and will become an integral part of our lives and financial world,” said Berger. More and more business models are emerging based on nonfungible tokens (NFTs), for example, which have been largely exempt from MiCA. (The new regulation will only address crypto-asset service providers that offer services for NFTs).

But according to Berger, NFTs are next on the docket, with European lawmakers looking at what type of regulation would benefit the industry and consumers.

Schildt also expects further regulations on NFTs relatively soon. “We should reconsider the traditional classification of investment products.” According to the expert, in the future, investments “that were previously considered ‘art collections,’ we will also qualify as capital investments.”

DeFi is a hot topic in European policy making

Some aspects of MiCA have yet to be defined through upcoming technical standards and guidelines.

For example, what are the specific liquidity requirements for electronic money token reserves? EU regulators will develop these standards over the next 12 to 18 months, and “the practical success of MiCA will largely depend on this implementation work — also referred to as Level 2 legislation,” Circle’s Hansen said.

Hansen further noted that, beyond MiCA, EU institutions are finalizing a new Anti-Money Laundering (AML) rulebook that will be “critical for crypto firms.”

Another critical review is that of PSD2, the EU’s main payments directive, which will also significantly impact crypto firms.

And finally, in about 18 months, the European Commission will publish a detailed report on DeFi and may take further legislative steps to regulate the space. “Brussels prides itself on being a global regulatory leader, and MiCA is just the first of many steps to come,” said Hansen.

Unstoppable Finance’s Grosskopf also expects DeFi regulation to become a hot topic following the next round of elections in Europe, as MiCA will not apply to “crypto-asset services provided in a fully decentralised manner without any intermediary.”

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“I think it’s important to be proactive and start thinking about how to regulate DeFi as early as possible in order to influence the process,” he said, stating that the new AML regulation is currently under discussion and will most likely become a reality before MiCA.

Although it’s still unclear exactly how European lawmakers will regulate NFT and DeFi or whether there will be new requirements regarding smart contracts, the success of the first step toward regulation — MiCA — could provide a significant boost to both EU crypto businesses and the EU economy as a whole. However, whether this success is realized will depend on the practical implementation standards developed in the future.

Crypto in Europe: Economist breaks down MiCA and future of stablecoins

A principal economist of the European Commission shares his views on stablecoins and the future of regulations in Europe.

In October 2022, the European Union finalized the text of its regulatory framework called Markets in Crypto-Assets or MiCA. The final vote on the new regulation is scheduled for April 19, 2023, meaning the days of an unregulated crypto market in the EU may soon be over. The MiCA regulations introduce clear guidelines for handling cryptocurrencies and consumer protection, and divide crypto assets into different sectors, each subject to specific rules.

The European Commission — the executive branch of the EU responsible for proposing new laws — first proposed the far-reaching regulations in 2020. The MiCA would apply to crypto service providers and issuers of digital assets in 27 EU member countries. By proposing to regulate crypto assets, the European Commission has taken a bold step, displaying the capacity and will to address complex issues creatively.

Joachim Schwerin is the principal economist at the Digital Transformation of Industry unit within the European Commission’s Directorate General for the Internal Market, Industry, Entrepreneurship and SMEs (DG GROW).

Schwerin is responsible for policy development regarding various aspects of token creation, its distribution and regulation (token economy), and the economic applications of distributed ledger technologies.

In 2020, Schwerin coordinated DG GROW’s input into the EU’s Digital Finance Strategy, including MiCA. Speaking to Cointelegraph, Schwerin shared his views on the importance of MiCA, the role of stablecoins, and why he hasn’t ever questioned the merits of blockchain and crypto, even in the wake of Terra’s collapse or the FTX crash.

“We want to develop and promote, not slow down”

With MiCA, the European Commission has adopted a regulatory framework that should minimize the negative consequences of incidents like the insolvencies of FTX and BlockFi in the future. The law was not in force at the time of the FTX case, but Schwerin hopes it will come as soon as possible, saying this should “clearly underpin the precautionary principle.”

“We promote the crypto sector and want to support its organic, market-driven development. The many positive opportunities should be recognized and used. It is like in sports here: Defending can make sense in certain phases of the game, but mostly defending means that a team is too bad to take the game into its own hands. We want to develop and promote, not slow down.”

For Schwerin, FTX was a typical case of an emerging and relatively unregulated industry finding its footing and developing its products and services. Indeed, he stated incidents like FTX and Terra’s collapse provided a chance for the cryptocurrency community to rally, condemn illicit behaviors and work to rebuild the industry’s reputation.

The crypto community is now focusing even more on better rule-setting and compliance in regulated or soon-to-be-regulated environments. It’s also looking more at truly decentralized mechanisms to reduce the potential for error by empowered individuals, Schwering added.

“All of this is positive and does not change the narrative of crypto as a success story with much more future potential.”

Blockchain as a philosophy

Schwerin sees the benefit of blockchain technology primarily in applications for the real economy. He said that Bitcoin (BTC) and other cryptocurrencies are “nice and fascinating with lasting significance,” but these are private concepts and “we don’t need to spend public resources on them.”

Schwerin is confident that the benefits for small businesses and the general population must be evident if the government will tackle something with public resources. And this is precisely the potential that blockchain has:

“That’s why, from the beginning, we didn’t see blockchain primarily as a technology but as a philosophy. [We saw it] as something that enables a true form of decentralization that creates trust; trustworthy technology that also opens up market opportunities for small businesses worldwide and allows many people with the same interests — but who don’t know each other — to come together digitally in the real world and develop projects.”

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The European Commission had this understanding of blockchain technology in mind when discussing dubious initial coin offerings from 2017 to 2018, or that money laundering was supposedly easier with crypto.

But European regulators understood that blockchain technology’s nature — thanks to its transparency and traceability — makes it much easier to track crypto transactions, and distinguish between regular and illicit activities on-chain.

According to Schwerin, financial crime related to cryptocurrencies is much lower than in traditional forms of finance.

“That is why we did not depend on any examples of criminality or the Terra case, just as we did not depend on FTX or any next case of that sort, but we were and are 100% convinced of the technology. We got involved with it early on, and because of that, we had already learned so much by then that we were in a position to work on the MiCA regulation in record time.”

But what about stablecoins?

After the collapse of the Terra ecosystem, the European Central Bank (ECB) issued a report claiming that stablecoins posed a threat to financial stability, but Schwerin does not share this view.

According to him, society needs stablecoins in many different forms because they have important functions within the crypto space, like cushioning price fluctuations and facilitating transactions; this is why the European Commission has allowed stablecoins in principle in the MiCA regulation.

“We have not banned anything, but we have developed basic rules for private stablecoin issuers that we think are reasonable. For example, they must have appropriate minimum liquidity as a reserve”.

Regarding Terra, Schwerin sees the whole thing as a learning process, saying, “The next similar project will simply be better because people have already had this experience. It is a natural evolution of innovation.”

Despite this, there are doubts about whether stablecoins will find a home in the EU. The largest stablecoins — Tether (USDT) and USD Coin (USDC) — are pegged to the United States dollar, with Circle’s euro-pegged stablecoin also issued outside the eurozone. When MiCA comes into force, should we expect more euro stablecoins?

Schwerin hasn’t ruled out the emergence of new euro stablecoins in the EU, but he isn’t expectant either. He says that the macroeconomic context, geopolitics, monetary policy and the euro are simply not moving in that direction.

The MiCA alone is unlikely to significantly increase the number of euro-denominated stablecoins in the euro area, Schwerin stated. “However, MiCA could help us to become more open to stablecoins as a whole.”

When asked whether MiCA could become a ground-breaking global regulatory standard, Schwerin said he sees great interest from other countries, especially the United States. In his view, MiCA is a particularly good example of a regulatory approach that is both innovative and liberal for global regulation of the financial sector.

“However, even though MiCA is ready, we have to be aware of the pace of innovation in the crypto sector and the new challenges it will bring. It was, is and continues to be a long process of learning.”

The views expressed in this interview are those of Schwerin personally and do not reflect or represent the official position of the European Commission.

European DeFi startups saw 120% increase in VC investment in 2022: Data

Despite the ongoing tumultuous market conditions, venture capital investments in European crypto startups hit an all-time high of $5.7 billion in 2022.

2022 was a turbulent year for the crypto space, from an ongoing bear market and high-profile collapses of some of the industry’s most prominent players, like Terra and FTX. Despite the setbacks, venture capital (VC) investors continued to show support for crypto startups.

According to a new study released by European investment firm RockawayX, VC investment in crypto startups based in Europe reached its all-time high in 2022, with $5.7 billion invested

European decentralized finance startups hit $1.2 billion in 2022 — a 120% increase from the previous year’s investments of $534 million.

Viktor Fischer, the CEO of RockawayX, pointed out that the crypto market is cyclical. During the 2018 winter, “the total digital asset market cap fell by 80%, but startup funding activity held steady.”

“Investments made when digital asset prices were depressed materialized in tech and usage traction alongside ‘bull market’ price recoveries.”

Europe is also home to the highest number of crypto startups (3,977), according to the headquarters location.

However, it falls behind the United States in the number of startups with over a million dollars of funding and companies with a value of over $1 billion, knowns as unicorns.

Cumulative number of crypto startups by HQ location. Source: RockawayX

Top global investors in European startups include Animoca Brands, Coinbase, Blockchain Capital and the Digital Currency Group. 

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In Europe, investment in startups that provide financial services made up more than half (52%) of all investments, with infrastructure and Web3 making up 32% and 16%, respectively.

Crypto VC investment by sector in Europe (2022). Source: RockawayX

However, compared with 2021, investment in financial service-based startups declined by 19%, and infrastructure grew by 24%.

Europe’s growing prominence as a crypto-friendly region comes as lawmakers in the European Union finalize the highly anticipated Markets in Crypto-Assets (MiCA) regulations. 

The regulations have been postponed twice by the EU due to translation issues. Laws passed in the EU must be translated into all 24 official languages of the member states.

At the time of writing, a final vote on the MiCA rules is set for April 2023.

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European Commission to ensure ‘healthy competition’ in the metaverse

Margrethe Vestager, the competition commissioner, stressed the need to anticipate and plan for changes in technological advancements.

Considering the regulatory struggle to keep up with ever-evolving innovations, Margrethe Vestager, the executive vice president of the European Commission for a Europe fit for the digital age, and commissioner for competition since 2014, recommended a headstart into brainstorming implications of technologies such as the metaverse and ChatGPT.

While speaking about competition policy at the Keystone Conference, Vestager highlighted how the digital transition and the shift to a digital economy had brought risks and opportunities for everyone. She believes that legislation lags behind technological advancements, adding:

“We have certainly not been too quick to act — and this can be an important lesson for us in the future.”

While the enforcement and legislative process will continue to stay a step behind tech innovations, Vestager stressed the need to anticipate and plan for such changes. She stated:

“For example, it is already time for us to start asking what healthy competition should look like in the metaverse or how something like ChatGPT may change the equation.”

The commissioner also revealed that the European Commission would enforce antitrust investigations from May 2023 aimed at the Facebook marketplace and how Meta uses ads-related data from rivals.

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Feb. 15 marked the launch of the European Blockchain Regulatory Sandbox, which provides a space for regulatory dialog for 20 projects per year through to2026.

On the other end of the spectrum, European Union lawmakers are in talks about using zero-knowledge proofs for digital IDs. Cointelegraph’s report on the matter highlighted:

“The new eID would allow citizens to identify and authenticate themselves online (via a European digital identity wallet) without having to resort to commercial providers, as is the case today – a practice that raised trust, security and privacy concerns.”

Zero-knowledge proofs have recently been at the center of researchers’ attention as a way to ensure regulatory compliance and privacy in digital currencies.

Bitcoin B logo lights up Germany’s tallest building in Berlin

Berliners could see the Bitcoin B projected onto the Berliner Fernsehturm tower on January 21.

The Bitcoin (BTC) logo lit up the night sky in Berlin this weekend, adorning Germany’s tallest building with a giant orange B.

Source: Twitter

On January 21, the Bitcoin logo illuminated the Berliner Fernsehturm tower–known as the TV Tower. German Bitcoiners took to Twitter and social media to share photos and videos of the illumination, then shared by prominent Bitcoin Twitter accounts.

The man behind the B, a German Bitcoiner called Tilo told Cointelegraph why the idea came to him:

 “We just want to call attention on bitcoin! We’re fans of Guerilla actions like this and will keep on track.”

Tilo is CEO of an events agency that will host the “Best of Blockchain” conference this year. He explained that the process is simple for setting up light displays: “what you need is a mixer, power station, special Bitcoin logo,” in one of the comments.  Tilo had tried the process at the end of last year, “But the beamer I used was too weak,” he explained. 

It’s not the first time the Bitcoin logo or themes have been projected onto iconic buildings. In May 2021 in London, “Fiat is the bubble, Bitcoin is the pin,” was projected onto the Bank of England.

Tilo had previously beamed Bitcoin slogans onto the iconic Berlin wall and had shared an inventory of products required to coordinate illuminations for those interested in trying it out. However, he insists that these kind of “advertisements” are not technically allowed, so it’s best to tread with caution.

The Bitcoin B on the Berlin Wall. Source: Twitter

Whereas the Reddit group for Bitcoiners in Germany celebrated the event with a chain of comments saying “Noice,” the subreddit for Berlin residents took a different approach. One commenter criticized the light display as “Light pollution,” whereas another hope that “It [Bitcoin] never catches on.” They continued:

“Bitcoin is turbo capitalism without limits and morals, every six months disguised in a different guise and motto.”

The price per Bitcoin now sits comfortably in the $20k range having surged from the mid-teens, while network security recently hit all-time highs. The hash rate, or the number of searches performed by Bitcoin miners per second, recently punched through to 300 Exahash per second.

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Moreover, the number of Bitcoin users worldwide is into the millions, while the developing world is beginning to research and take advantage of Bitcoin’s decentralized and sovereign properties. In Germany’s capital, Berliners can use Bitcoin to pay for Subway sandwiches over the Lightning Network.

Demand for widely used euro stablecoin is huge, says DeFi expert

The U.S. company Circle is launching a regulated stablecoin that is pegged to the euro, but what does this mean for the eurozone?

The market capitalization of Tether (USDT), a United States dollar-pegged stablecoin, is currently over $65 billion. USD Coin (USDC), another stablecoin backed by the U.S. dollar, clocks in near $55 billion. Some reports estimate that the total market cap of dollar-backed stablecoins is over $160 billion.

Despite this success of dollar-based stablecoins, there has not been a euro stablecoin that is even remotely comparable in size. By the end of June, the U.S.-based company Circle announced that it will launch its own euro stablecoin, Euro Coin (EUROC), on the Ethereum blockchain. With a euro-based stablecoin, uncomplicated euro transfers will be possible worldwide in the future, as is currently the case with the U.S. dollar.

Instead of the eurozone-based business, Circle has opted to issue the planned euro stablecoin via the U.S. bank Silvergate. But, is it permissible for a digital coin tied to the euro to be issued outside the eurozone? How will European regulators react? Can Circle simply ignore the upcoming Markets in Crypto-Assets Regulation (MiCA) and operate the stablecoin from outside the European Union? And, why is there still no major euro stablecoin?

Cointelegraph auf Deutsch asked these questions to Patrick Hansen. The former head of blockchain at the German digital association Bitkom was, until recently, head of strategy and business development at wallet provider Unstoppable Finance. Now Hansen advises companies such as Presight Capital and the Blockchain Founders Group and has a hotline to the European Parliament.

Euro stablecoin issued outside the EU

The European Central Bank (ECB) is keeping its options open on whether and when to launch a digital euro. However, it’s still not really clear to Patrick Hansen what exactly the ECB wants to achieve with a central bank-issued digital euro. “Whether it is to become a kind of digital cash or rather a new payment option. That’s why it’s so difficult to evaluate the project,” he said. 

Fundamentally, though, Hansen thinks that private companies, led and overseen by policymakers, are better suited to bring innovation to the current financial system. According to him, European banks will be much more active in the coming years: “Right now, I think two things, in particular, are holding them back. First, banks want to wait for MiCA regulation, and second, the ECB’s specific plans for a digital euro are still not clear.”

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That’s why Hansen is a big fan of Circle’s decision to launch a euro stablecoin. The euro accounts for almost 40% of global SWIFT payments, 20% of global foreign reserves, but only 0.2% of global stablecoin market capitalization. “It is in the EU’s and the eurozone’s interest to change that. EUROC is a promising step in that direction,” Hansen said.

MiCA regulation is unavoidable

In Hansen’s opinion, MiCA automatically kicks in here since it’s a euro stablecoin. Circle cannot avoid applying for the appropriate licenses in the EU and having the EUROC supervised by EU authorities. But this is, Hansen thinks, also Circle’s intention.

According to Hansen, Circle will probably set up a European legal entity and then apply for an e-money license, which is a prerequisite for issuing e-money tokens. Depending on how widely the coin is adopted, EUROC already falls into the category of “Significant e-money-tokens” in the MiCA, which again entails higher capital reserves, liquidity and interoperability requirements.

“Circle could also theoretically use the liability umbrella of an existing e-money institution and cooperate with it. That would be a slightly more complex process operationally and legally,” Hansen explained, adding:

Circle’s euro stablecoin is supposed to be backed one-to-one by euros deposited in bank accounts. However, the reserves are held by the U.S. bank Silvergate while Circle itself is based in the United States. How then can the new euro coin be regulated with the upcoming MiCA regulation? 

“In terms of USDC, Circle’s primary stablecoin pegged to the U.S. dollar, Circle could refrain from applying for a MiCA license. The pros and cons, for example, that unregulated stablecoins may no longer be listed by regulated crypto trading venues in the EU, need to be weighed here. However, I don’t see any way for EUROC to circumvent MiCA.”

According to Hansen, regulation can promote legal certainty, trust and adoption, but on the other hand, it can create high barriers to market entry. In the area of stablecoins and nonfungible tokens (NFTs), MiCA goes a step too far and threatens to become a major hurdle for many companies, Hansen said.

Still no significant euro stablecoin

Also playing a role are regulated challenges, the weakness of the euro and the first-mover advantage of U.S. dollar-based stablecoins like USDT and USDC. The network effects of stablecoins are so significant that many Europeans also use USD stablecoins for convenience. In addition, the volatility of crypto assets is usually high and many EU retail investors are comparatively unconcerned about the risk of U.S. dollar usage in the forex market. Hansen said:

Existing euro stablecoins seem to be used less and, according to Hansen, there are several reasons for this. Negative interest rates on bank deposits in the eurozone have made reserve-backed stablecoin business models virtually impossible. 

“Fundamentally, however, the demand for a widely used euro stablecoin is huge and many of the points above will get better in the coming months.”

Whether the EUROC will become a big seller similar to the USDC will be decided by the market. Demand, especially from larger financial institutions, for a trustworthy and regulatory-approved euro stablecoin is high, Hansen said. 

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However, he is sure that euro stablecoins won’t be able to keep up with U.S. dollar stablecoins, stating the euro can’t do that even outside the crypto world for various reasons. But, those euro stablecoins that clear MiCA hurdles will see strong adoption and usage while increasing the overall market share of euro stablecoins, Hansen said, adding:

“USDC is the undisputed number-one stablecoin in the decentralized finance market. Therefore, there is a good chance that EUROC will also play a good role there. Anyway, I would be happy to see more and more euro-based liquidity pools and euro investment opportunities in the DeFi space.”