The Dynamics and Implications of the EU Proposed Framework on the Crypto Market and Crypto Trading

Crypto Market and Crypto Trading
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Since Satoshi Nakamoto simplified the dream for a decentralized form of value and currency exchange in 2008, wave after wave of finance-related innovations has emerged. These innovators, with many taking on the roles and responsibilities of crypto-asset issuers and service providers, have found ways to simplify financial transactions and investments.


The majority of these innovators have built on the blockchain system for a distributed ledger technology (DLT) to do amazing things. As such, rather than only technically inclined people having the best of the provisions of the technology, ordinary people have also benefited greatly. Also, the lack of global regulations on the new system has allowed it to flourish, making overnight millionaires of timely miners and investors.


And while the uptake of cryptos in developed and developing countries grows daily, the uncertainties inherent in the system have caused hesitation in some quarters. The EU (European Union) is one of such hesitant parties.


Despite realizing the opportunities for sustainable growth and development that the system promotes, the EU has been mostly silent on maximizing the offerings of the crypto industry. Until the “Proposal for a Regulation for the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937,” an initiative that is 167 pages long and consists of 126 articles, came into being.


This article analyzes this framework proposed by the EU in light of what it means, what the various stakeholders of the crypto industry should expect and an overall estimation of who the proposal is good for.


The EU Regulation Proposal: What It Is


The European Commission published the proposal for a regulation of cryptos and their markets on September 24, 2020. However, the proposal was not adopted until November 24, 2021—more than 12 months later.


The EU’s proposed framework for the regulation of crypto-assets and markets is exactly what it says—an initiative to regulate the activities of the cryptos market and exchanges. However, it is not driven by any intention by the EU to control the industry, only to make it legitimate and trustworthy.

Also, the proposal intends to repair fragmentations in the European regulatory framework. This way, the entire region would have one block of regulatory measures rather than multi-varied national measures.


The Motivations for the EU Initiative


The EU used suggestions from the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) in order to understand the full range of crypto mechanisms. This way, the conclusions can be as final as possible since it is backed by inclusive research.


What the EU wants to do is implement the full spectrum of its Digital Finance package in the crypto market. Once this is in place, Europe will be able to take full advantage of the offerings of cryptos and other crypto-related stuff without subjecting its citizens and economy to the pitfalls of the industry.


As the document reports, “One of the strategy’s identified priority areas is ensuring that the EU financial services regulatory framework is innovation-friendly and does not pose obstacles to the application of new technologies.” As such, the framework’s motivation can be summarized as the need to:


  • Tokenize traditional financial assets. Thus, cryptos can be integrated into the EU’s business operations framework and regional market.
  • Legalize everything. In this faction, the EU can unify the current crypto operational substructure with current legal frameworks to increase uptake at a continental level.
  • Present a unified regulatory charter across Europe. Thus, there wouldn’t be discrepancies in the EU’s attitude to all things crypto-related.


In short, the framework has four primary objectives:


  1. provide legal certainty,
  2. support innovation,
  3. instill appropriate levels of consumer and investor protection and market integrity, and
  4. ensure financial stability.


The Coverage of the Initiative


The initiative does not cover every form of virtual money and currency. It only takes into consideration crypto-assets and other related assets that are driven by the blockchain distributed ledger technology (DLT). Thus, asset-referenced tokens and e-money tokens are the main punches of the initiative.


Also, the proposal covers two conditions for the operation of the crypto market, particularly for service providers. There is an opt-in option which means that those that want to stay unregulated can remain so. There is also an all-in harmonization option that insists on complete inclusion irrespective of prior plans. The EU insists on the second option.


Furthermore, the proposed regulation places the EBA and ESMA as competent authorities to oversee all activities related to crypto-asset exchanges. Thus, these are the regulatory powers at the forefront that are responsible for implementing the various conditions of the proposal.


The Status Quo of the Crypto Market & Crypto Trading


To understand the core of the proposal, it is expedient to highlight the status quo of the crypto market and the dynamics of its stakeholders and transactions.

Presently, the crypto market is mostly unregulated (which means that there is no central authority supervising it) at least at a global level. By implication, it is an open market where there is a lot of freedom for decision-making.


Also, the extensiveness of the open crypto market means that anybody with sufficient knowledge of blockchains can take advantage of it. As such, there are many coins, protocols, exchange platforms, and more.


While these are the pros of the traditional unregulated crypto market, there are associated cons. Anonymity is a core element of the system, so criminal activity is unavoidable. Hoarding of funds—and whale activity by implication—is also a thing.


What the EU Regulation Proposal Means to Do


What the regulation proposal intends to accomplish is straightforward. It is to bring about harmonization between what cryptos can offer (along with DLT) and the financial obligations of the EU. This is why the legalization of the market and its agents is a leading objective of the proposed framework.

Presented in this manner, the framework has the best interest of crypto stakeholders at heart. For example, payment tokens can be better optimized to “... present opportunities in terms of cheaper, faster and more efficient payments, in particular on a cross-border basis, by limiting the number of intermediaries.”

So, the framework bridges decentralized finance (DeFi) with its centralized alternative (CeFi). Thus, what the EU means to do is

  • Create a framework for the issuance of services related to cryptos,
  • Design a safety net for crypto consumers and investors,
  • Reduce the risks of hacking and systemic abuse,
  • Provide market integrity, and
  • Stabilize the crypto market alongside already existing institutional economic conditions.


What to Expect from the Implementation of the EU Proposal


The crypto market consists of many stakeholders all of whom can be categorized under three classes: crypto-asset issuers and service providers; miners and crypto traders; and investors.


Effect on Providers and Platforms of Crypto Trading


The Good Side of the EU Framework on Crypto Service Providers


  • The security afforded by the framework will let providers better scale their businesses: They will be able to cover more geographical and commercial areas. This will attract more long-term investments and larger capital from corporate bodies.
  • The system is more stable: As such, crypto-asset issuers and service providers will be able to offer better guarantees of returns on investments.
  • Cutbacks on hacking and fraudulent activities: The framework will ensure that blockchains are better protected against criminal activities. So, service providers might not need to spend as much on security protocols.


The Bad Side of the EU Framework on Crypto Service Providers


  • Far less freedom of operation: Crypto-asset providers will be tasked with having registered offices in the EU Member States, for example. Thus, the market will no longer be as open as Nakamoto’s model suggested.
  • Timed licenses: Service providers’ authorization to operate can be withdrawn if they fail to meet certain conditions. This is essentially a noose on the necks of these providers.
  • Greater caution with whitepapers: Whitepapers have to be submitted to authorized powers before publishing. So, service providers can no longer be willy-nilly about their offers.
  • No more surprises: Service providers must report all important information before they can be authorized. They have to include information about the issuer, the project, the underlying technology, the risks associated with joining the network, and more.


Effect on Crypto Investors


The Good Side of the EU Framework on Crypto Investors


  • Assurance of exchange platform’s seriousness: Investors can rest assured knowing that service providers are competent and dedicated to providing the services promised in their whitepaper.
  • Dependable comparison of trading platform’s merits: The portfolios of trading platforms can be compared. The current system does not have this ability since there is no framework that manages to effectively monitor their progress all at once.
  • Even playing field for multi-variable investments: Investors can track their fiat and cryptos in and out of the system without a hassle.
  • Withdrawal rights: Investors can pull out anytime they want. The proposal emphasizes a right of withdrawal without worrying about withdrawal costs or having to give reasons why they are withdrawing.


The Bad Side of the EU Framework on Crypto Investors


  • Limited hoarding capabilities: Crypto investors will not be able to hoard indiscreetly. The system is monitored for any activity that might hurt the majority of crypto users on any platform.
  • Rigid accountability: Crypto investors must report their intention to increase their holding of asset-referenced tokens. And this has to be done in writing. The same for whenever an investor wants to reduce the size of their holding.


Effect on Everyday Crypto Traders


The Good Side of the EU Framework on Crypto Traders


  • True cross-border transactions. Crypto traders can effectively trade across the EU and treat the entire continent as a single block.
  • Tokens and coins are more trustworthy and less volatile (possibly). This is expected since tokens and coins are backed by authorized supervision.
  • Better integration with the system. Crypto traders may not have to worry about false advertising since every authorized issuer of crypto-assets would be liable to the EU regulation.
  • Withdrawal rights: Crypto traders can decide to discontinue their subscription to any trading platform. No incurred costs, no delay, no justification for the move.
  • The system is more user-centric than technology-centric. Everything appears to be in the interest of the consumer. Crypto-related service providers are even tasked with promptly responding to filed complaints.


The Bad Side of the EU Framework on Crypto Traders


  • No anonymity: Crypto traders can no longer trade in secret or use anonymous personas. Instead, the KYC (Know Your Customer) protocol will shield the system from such activities.
  • Seeming relapse in the financial system. It doesn’t look like much has changed. Instead, the financial system appears to have relapsed.
  • Transaction dynamics might deflate: Legislative inclusions might slow down transactions. This is a possibility especially when there are contentions over transactions and the service provider has to participate or cover customer losses.


Overall Conclusion: Is It Good or Bad?


There are clear pros to the proposed EU framework. For one, banks can now work with the crypto industry without fear. The risks associated with anonymity (which is an integral component of the current crypto market) are also reduced substantially.


Also, different crypto regulatory regimes and frameworks across Europe make it difficult to truly utilize the opportunities afforded by crypto applications in the region. A unified framework is good.


Moreover, the framework is great for consumers (that is, crypto investors and traders). Protection right is up there with greater security as the system looks to be customer-centric. Also, market manipulation might become a thing of the past due to the lid that the initiative places on insider information.


However, there are also clear cons. For one, there are many restrictions for the issuers of crypto-assets and crypto-related service providers. These would have to consider every offer to the customer as being liable to cancellation by the EU regulation.


Also, the regulation appears to be true in every sense of the word. This might likely cut down the number of crypto issuers and project developers since they do not all have fleshed-out ideas (and will likely be penalized for it).


Furthermore, the EU framework will ensure that there are fewer surprises now that insider information has to be leaked (in a sense) by the service providers themselves. This should have no significant effect on innovation, but there is no guarantee that it won’t.


Overall, the EU framework is as promised: a great development for crypto users/consumers. But it is not so great for crypto service providers. Also, the proposed regulations are strong and can be interpreted as having upended the core quality of the blockchain revolution.

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