This week, European Union (EU) negotiators will get together for a last-ditch effort to reach a deal on anti-money-laundering measures and a new framework for approving crypto service providers.
The EU’s crypto legal framework may be changed by meetings on Wednesday and Thursday, but there are still big questions about how non-fungible tokens (NFTs) are treated, Bitcoin’s effect on energy use, and the private use of unhosted wallets.
The first step will be to talk about a controversial rule about the transfer of funds, which would require wallet providers to find out who is involved in a cryptocurrency transaction. On June 29, officials from the EU will meet behind closed doors to finish working out the details of these proposals.
On March 31, the European Parliament passed a wide range of privacy protections. These were meant to stop digital assets from being used for illegal drugs, child pornography, or terrorism, which worried the industry because it could slow down new ideas.
Still, three people involved in the talks told CoinDesk that the round of talks planned for Wednesday will be the last one. That suggests that the remaining legislative disagreements might be solved by national governments sitting in the EU Council and lawmakers from the European Parliament. Both groups must agree on a legal text.
More: Crypto Privacy Positions Get Tougher Before a Crucial EU Vote
How to classify transfers to and from “unhosted wallets,” which are private ways to hold crypto assets that aren’t controlled by a licensed service provider, is the most controversial issue, and it’s also the last one to be solved.
Proponents say that the final language will keep the idea of verifying customer ID, but they admit that this won’t always be possible. The rest of the talks might be about details, such as the exact amount of money that would require reporting and whether or not both parties’ information needs to be made public.
Landmark
On the second day, June 30, the Markets in Crypto Assets Regulation (MiCA), which has to do with this topic, would be talked about again.
MiCA is the EU’s landmark regulation for crypto assets. It requires issuers to register, create white papers with information for potential investors, and keep enough reserves for large-scale stablecoins. Many in the industry were happy about it because it would make it easier for crypto businesses to reach the EU’s huge domestic market of 450 million people.
According to a secret memo that CoinDesk saw, the French government thinks that the meeting on Thursday will be the last. It is very likely France’s last chance to take credit for finishing the bill, since it will no longer be in charge of the council after July 1.
One important question is whether the scope should be broadened to include non-fungible tokens (NFTs), which were left out of the first draft of the 2020 MiCA. Since then, assets like Bored Apes have become more popular, and so have scams like wash trades and pump and dump schemes, in which traders change prices to make quick money. This kind of wrongdoing, which is already illegal in normal financial markets, is now getting the attention of the government.
France warns that the EU’s MiCA rules could require NFT issuers to centralize and register.
Officials like Peter Kerstens of the European Commission have said that it would be “silly” to require NFT issuers to publish a white paper for each token. However, they have said that those who provide NFT wallets or brokerage services are similar to those who provide bitcoin services and should be subject to the law.
Large Apes
Even without the white paper requirements, a bigger rule might need to allow NFT markets like OpenSea. This is something that European Parliament lawmakers are pushing for.
The French daily says that the government is still thinking about making all NFT service providers register. Exemptions could be made for artists who offer wallet services for their own products and for low-volume marketplaces, like auction houses that only occasionally trade NFTs or gaming platforms for low-value goods.
Still, the addition of NFTs is causing worry in the business world.
The head of the German Blockchain Association, Florian Glatz, said on Twitter on Wednesday, “This is a disaster.” “The story doesn’t end well.”
Marina Markezic, who works with Glatz at the European Crypto Initiative (Euci), thinks that NFT marketplaces need more protections to stop insider trading. “Of course, we agree that there have been pump and dumps and terrible things have happened in the NFT area,” she said.
But she stressed that it is “completely wrong” to just copy and paste financial market rules made for fungible assets into the new NFT arena.
For example, one share of Tesla is the same as any other, but each NFT is, in theory, different, and the exchanges where they trade could be decentralized. So, it’s not clear how you’d put in place, say, rules for brokers to find the best price for their clients or limits on giving financial advice. Members of the Euci say that counting NFTs as financial assets would unfairly separate them from their offline counterparts, such as real works of art.
Simon Polrot of Euci said, “We may look into a separate dedicated law” for some NFTs, but it would have to come after MiCA and make a distinction between tokens tied to crypto banks and tokens that represent real things. “It makes no sense to put all of these things in the same category.”
The damage that cryptocurrency mining does to the environment is another MiCA problem. Lawmakers have already called for carbon-cutting measures, which the industry has said could lead to a ban on bitcoin. Fabio Panetta, the head of the European Central Bank, has suggested putting an extra tax on energy-intensive mining techniques like proof-of-work (PoW).
Two people who know about the talks say that it doesn’t look like there will be such strict rules. Instead, the final wording is likely to just make things clearer. That could mean, for example, that white papers have to talk about how a consensus procedure affects the environment.
Here’s more: The EU’s plan to ban Bitcoin didn’t work, but experts still have ideas for lowering the carbon costs of crypto.
Even after the policy framework is finalized, it must be put into legal language. Because MiCA will be put into place in stages, it may not be used until 2024. Policymakers are already asking for a follow-up to a law that doesn’t answer a lot of questions, like how to handle decentralized finances.
Christine Lagarde of the European Central Bank told members of the European Parliament on June 20: “We hope you can also look at MiCA 2.” She was asking for a new rule that would cover crypto staking and lending, as well as activities where there are no middlemen or traceable issuers.
After a few rough months with EU crypto laws, the talks this week may not be the end, but they could be the start of the end.
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