The EU Parliament has approved what has been described as the "world's most sweeping cryptocurrency rules", also known as the Markets in Crypto Act (MiCA).
The legislation will impose a number of requirements on crypto platforms, token issuers and traders around transparency, disclosure, authorisation, and supervision of transactions, the EU Parliament said, as it stressed its goal of reducing risks for consumers.
The rules will apply to crypto assets, including currencies such as Bitcoin and Ethereum, as well as tradable tokens whose value is secured using blockchain technology, such as NFTs.
The European Parliament also voted 529-29 in favour of a separate law known as the Transfer of Funds regulation, which requires crypto operators to identify their customers in a bid to halt money laundering, with 14 abstentions.
"We're protecting consumers and safeguarding financial stability and market integrity," said European Commission's Mairead McGuinness. "The rules will start applying from next year."
As part of the new restrictions, platforms will be required to inform consumers about the risks associated with their operations. Moreover, stablecoins will also be required to maintain ample reserves to meet redemption requests in the event of mass withdrawals.
Additionally, MiCA addresses environmental concerns surrounding cryptocurrencies, with firms forced to disclose their energy consumption as well as the impact of digital assets on the environment. According to the Cambridge Bitcoin Electricity Consumption Index, bitcoin alone uses an estimated 26.73 terawatt-hours of electricity per year, more than the annual electricity use of whole countries such as the Netherlands, Argentina or the United Arab Emirates.
The regulations "mark the end of the Wild West era for the unregulated world of cryptoassets", said EU lawmaker Ernest Urtasun, during the debate.
The European Securities and Markets Authority will be the agency in charge of overseeing that these rules are met, and will be granted powers to step in and ban or restrict crypto platforms if they are seen to not properly protect investors, or threaten market integrity or financial stability.
"This puts the EU at the forefront of the token economy with 10,000 different crypto assets," said EU lawmaker Stefan Berger, who led the MiCA negotiations. "Consumers will be protected against deception and fraud, and the sector that was damaged by the FTX collapse can regain trust.
"Consumers will have all the information they need and all underlying risks around crypto-assets will have to be monitored. We secured that the environmental impact disclosure will be taken into account by investors in crypto assets. This regulation brings a competitive advantage for the EU. The European crypto-asset industry has regulatory clarity that does not exist in countries like the US."
Globally, crypto assets are largely unregulated and very volatile. This was made obvious last summer when the collapse of terraUSD stablecoin led to a loss of trust in the sector, with bitcoin facing its worst quarter in more than a decade and major US crypto lender Celsius Network freezing withdrawals and transfers.
Changpeng Zhao, CEO of Binance, one of the largest crypto exchanges hailed MiCA as a "pragmatic solution to the challenges we collectively face" and said his company was "ready to make adjustments to our business over the next 12-18 months to be in a position of full compliance".
The UK and US are two major crypto centres that might be influenced by these rules, as regulators in both countries have warned of the need for stronger safeguards in the sector. Earlier this year, the UK announced its plans to regulate the cryptocurrency industry, with the government looking to rein in some of the reckless business practices that characterise the "turbulent industry".
Last year, the Financial Conduct Authority began inspecting the money-laundering controls of UK-based crypto companies. Around that same time, authorities banned Binance from operating in the UK, as it lacked regulatory permissions. In June, Scotland Yard said it had seized a record £114m of bitcoin as part of an investigation into money-laundering offences.
The legislation will have to receive the approval of the Parliament and the EU council, representing the bloc's member states before it can be officially enforced. It is therefore likely that its provisions will start applying in June 2024.
