Regulation of the decentralized finance industry is a hot topic today. It seems that some regions are more open on this front than others. Nevertheless, Europe and, by extension, the European Union, have made notable progress, setting an example for other nations to follow.
The European Union is on a mission to create a regulatory framework for the cryptocurrency and blockchain industry. The EU recognizes that cryptocurrencies remain a hot trend and can no longer be ignored. However, the impact of new technologies should always be carefully assessed, as bitcoin and other currencies can disrupt the current status quo and usher in a new era of buying, selling, trading and managing assets. financial.
This includes covering all potential threats and risks posed by these cryptocurrencies, including fraud, cyberattacks, market manipulation, and other deceptive practices. In establishing the EU regulatory framework for crypto-assets, the European Commission assesses whether current EU legislation is sufficient to cover cryptocurrencies, whether new regulatory measures are needed and whether new guidelines are even necessary.
It should be noted that this initiative was put in place at the beginning of December 2019. This makes Europe one of the leaders in the regulation of cryptocurrencies or at least tries to clarify bitcoin and similar assets. The framework received support from policymakers in Spain, Italy and Belgium, prompting comments such as “key priority”. However, it is clear that EU Member States were waiting for a unified and streamlined approach to tackle the proverbial elephant in the room.
Although the above initiative was incorporated in 2021, it took until March 2022 for new developments to materialize. The European Parliament has put forward a proposal for regulation concerning cryptocurrencies. There were initial concerns about this proposal, as it would ban proof-of-work-based cryptocurrencies like bitcoin. Researchers and analysts have expressed concerns about the energy consumption and environmental impact of proof-of-work currencies, even though the calculations have been repeatedly refuted due to general biases and inaccuracies. .
Even so, there is no denying that proof-of-work currencies require tremendous electricity. Considering this aspect and pushing for wider adoption of renewable energy – initiatives within the global cryptocurrency community – are underway to help address these issues. The European Parliament has seen fit to lift the ban on proof-of-work currencies. Many see this as a big win for crypto, although the job is far from done.
The European Union’s slow and steady approach has proven beneficial and forward-thinking. While things may not be progressing as quickly as some would like, the Crypto Asset Markets 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. Furthermore, the proposal will enable a reliable oversight structure for cryptocurrencies and businesses in this sector.
This may not be the last step in the EU’s plans to regulate crypto. Other proposals have been rumored, including one that will help reduce the environmental impact of cryptocurrencies and help them meet European Green Deal targets. There are no indications of a crackdown on crypto-mining activities, but a further push towards sustainability and renewable electricity sources is not out of the question.
Despite the efforts of the European Union and the European Parliament, Europe remains a divided front for cryptocurrencies. On the one hand, there are progressive countries like Malta. Initially focusing on cryptocurrencies, the company introduced clear income tax guidelines, value-added tax regulations, a distinction between utility tokens and cryptocurrencies, and more. It has allowed Malta to thrive as a crypto hub in Europe.
On the other hand, regions like the UK are cracking down on cryptocurrencies, and especially stablecoins. The UK’s FCA is on a divergent regulatory path from that of Europe, although it aims to fully license and regulate the industry. These plans will see the UK Treasury regulate stablecoins, which are seen as an “immediate risk to traditional payment methods”. CAF will continue to investigate [unauthorized or unregistered] crypto firms, noting a sharp rise in cases since 2021.
The more aggressive approach of UK policymakers seems counterproductive to what the EU is doing. However, officials have confirmed that Britain will be “consistent” with EU regulatory policy. It’s unclear exactly how this will play out, but having more building blocks can lead to faster regulation – and legitimization – of cryptocurrencies across Europe.
More fights, battles and discussions await us for cryptocurrency in Europe and beyond. There are many aspects to consider and address, 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 go their own way for additional rules and safeguards.
Beyond the current approaches of regulators and policymakers at the EU level, there is a growing demand for a regulatory framework within the cryptocurrency industry. Rather than waiting for 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 create compliant environments and ecosystems.
However, the team is also working in the opposite direction. It is a way for traditional financial organizations to create regulatory-compliant DeFi solutions. This can be called “reverse decentralization”, but the approach has enormous merit. Decentralized finance can only grow by attracting cash, developers, users, traditional products and services. Bridging the gap between traditional and decentralized finance through a two-way 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. The approach is to work with the Swiss government – Switzerland is another crypto and blockchain forward-thinking region, like Malta – and traditional banks and risk management firms. Moreover, its approach paves the way for an open and regulated environment that requires little or no further intervention by regulators at the EU level thereafter.
As these regulatory-focused discussions rage on, the industry continues to innovate and push boundaries. Web3 technology is the next frontier to conquer. It borrows elements from decentralized finance but goes much further to put consumers in the driving seat and remove all middlemen from the equation. This poses a challenge for banks and other organizations and will require a radical shift in mindset on the part of today’s policy makers.
Moreover, Web3 technology is all around us. The financial aspect represents one of the many facets associated with this technology. It covers many aspects of daily life, including commerce, advertising, social activities, etc. hold.
That said, there is still a need for KYC and AML solutions, risk management, systematic fraud prevention, price manipulation, etc. 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 for this to happen, and further progress – both in the EU and globally – will need to materialize over the next few years.