Regulation of the decentralized finance industry is a hot topic today. It appears some regions are more forthcoming on that front than others. Even so, Europe, and by extension, the European Union, have made notable progress, creating an example for other nations to embrace.
The European Union has been on a mission to create a regulatory framework for the cryptocurrency and blockchain industry. The EU acknowledges cryptocurrencies remain a hot trend and can no longer be ignored. However, the impact of new technologies always needs to be evaluated carefully, as bitcoin and other currencies can disrupt the current status quo and usher in a new era of buying, selling, trading, and handling financial assets.
That includes covering all potential threats and risks posed by these cryptocurrencies, including fraud, cyber attacks, market manipulation, and other deceptive practices. By establishing the EU regulatory framework for crypto-assets, the European Commission assesses whether current EU legislation is sufficient to cover cryptocurrencies, if new regulatory measures are needed, and whether new guidelines are even necessary.
It is worth noting this initiative was put in place in early December of 2019. That makes Europe one of the leaders in cryptocurrency regulation or at least attempting to bring more clarity to bitcoin and similar assets. The framework received support from policymakers in Spain, Italy, and Belgium, yielding comments such as “key priority”. However, it is evident EU member states have been waiting on a unified and streamlined approach to addressing the proverbial elephant in the room.
While the initiative above was incorporated in 2021, it took until March 2022 until new developments came to fruition. The European Parliament advanced a regulatory proposal regarding cryptocurrencies. There were initial concerns over this proposal, as it would ban proof-of-work-based cryptocurrencies like bitcoin. Researchers and analysts have expressed concerns over the energy consumption and environmental impact proof-of-work currencies represent, even if the calculations have been refuted repeatedly due to bias and general inaccuracy.
Even so, one cannot deny that proof-of-work currencies require tremendous electricity. Being mindful of that aspect and pushing for broader adoption of renewable energy – initiatives from within the global cryptocurrency community – are underway to help resolve these matters. The European Parliament deemed it fit to remove the ban on proof-of-work currencies. Many consider this a big victory for crypto, although the work is far from done.
The slow and steady approach by the European Union has proven beneficial and forward-thinking. Although things may not progress as quickly as some would like, the Markets In Crypto Assets bill is another key milestone for the industry. After several revisions and delays, the Markets in Crypto Assets (MiCA) proposal was officially adopted in March 2022. Moreover, the proposal will enable a reliable supervisory structure for cryptocurrencies and companies in this industry.
That may not be the final step in the EU’s plans to regulate crypto, though. Other proposals have been rumored, including one that will help address the environmental impact of cryptocurrencies and make them meet the European Green Deal goals. There is no indication of cracking down on crypto mining activities, but a further nudge toward sustainability and renewable electricity sources is not out of the question.
Despite the efforts by the European Union and European Parliament, Europe remains a divided front for cryptocurrencies. On the one hand, there are progressive countries like Malta. Through its initial focus on cryptocurrencies, the company introduced clear income tax guidelines, value-added tax regulations, distinguishing between utility tokens and cryptocurrencies, etc. It has allowed Malta to thrive as a crypto hub in Europe.
On the other hand, regions like the United Kingdom crack down on cryptocurrencies, and in particular, stablecoins. The UK’s FCA is on a divergent regulatory path from Europe, although it aims to license and regulate the industry fully. Those plans will see the UK Treasury regulate stablecoins, which are considered an “immediate risk to traditional payment methods.” The FCA will continue to investigate [unauthorized or unregistered] crypto firms, noting a steep increase in cases since 2021.
The more aggressive approach by UK policymakers seems counterproductive to what the EU is doing. However, officials have confirmed Britain will be “consistent” with the EU’s regulatory policy. It remains unclear how that will play out exactly, but having more building blocks can lead to faster regulation – and legitimization – of cryptocurrencies across Europe.
More fights, battles, and discussions lie ahead for cryptocurrency in Europe and beyond. There are many aspects to consider and tackle, and establishing a unified framework will not be easy. However, proposals like MiCA show it can be done, even if some European countries continue to follow their own path for extra rules and safeguards.
Going beyond the current approaches by EU-level regulators and policymakers, there is a growing demand for a regulatory framework from within the cryptocurrency industry. Rather than waiting on the powers-that-be to make decisions, projects like Phree establish a new frontier. The team works with new and existing decentralized finance (DeFi) protocols to build compliant environments and ecosystems.
However, the team works in the opposite direction too. It is a way for traditional finance organizations to build DeFi solutions that are regulatory compliant. One may label this as “reverse decentralization,” yet the approach has tremendous merit. Decentralized finance can only grow by attracting mainstream liquidity, developers, users, products, and services. Bridging the gap between traditional and decentralized finance through a bi-directional approach is a big step forward for the industry.
Establishing such a foundation for DeFi and TradFi organizations would not be possible without collaborative efforts. There’s approach involves working with the Swiss government – Switzerland is another forward-thinking region regarding crypto and blockchain, like Malta – and traditional banks and risk management firms. Moreover, its approach paves the way for an open and regulated environment that requires minimal or no further intervention from EU-level regulators later on.
As these regulation-oriented discussions rag eon, the industry continues to innovate and push the boundaries. Web3 technology is the next frontier to conquer. It borrows elements from decentralized finance but goes much further to put consumers in control and remove all intermediaries from the equation. That poses a challenge to banks and other organizations and will require a radical shift in thinking by current policymakers.
Moreover, Web3 technology is all around us. The financial aspect represents one of the many facets associated with this technology. It tackles many aspects of daily life, including commerce, advertising, social activities, etc. Moreover, it has proven to establish new revenue streams, including play-to-earn gaming, move-to-earn mechanics, and whatever else the future may hold.
That said, there is still a need for KYC and AML solutions, risk management, addressing systematic fraud, price manipulation, and more. These are all existing concepts that need to be transformed into modern implementations to accommodate cryptocurrencies, blockchain, and Web3. Regulators will have their work cut out to make it so, and further progress – both in the EU and globally – will need to materialize over the coming years.