Upon request by the Committee on Economic and Monetary Affairs (ECON), the Policy Department for Economic, Scientific and Quality of Life Policies of the European Parliament published a new interesting study requested by the Committee on Economic and Monetary Affairs (ECON) concerning “Crypto-assets: key developments, regulatory concerns and responses” (the “Study”).
According to the Study, at the start of 2020, over 5,100 crypto-assets exist with a total market capitalisation exceeding $250 billion. Both lawful and unlawful crypto-markets exist. In particular, the study stressed that
Most legal activity in crypto-assets – and in particular in cryptocurrencies – takes place on crypto-exchanges. It relates mostly to the use of cryptocurrencies for speculative purposes. The illegal activity includes, amongst others, the buying and selling of illegal goods or services online in darknet marketplaces, money laundering, evasion of capital controls, payments in ransomware attacks and thefts. In this context, cryptocurrencies function mostly as a payment instrument.– Policy Department for Economic, Scientific and Quality of Life Policies
Remarkable is that almost half of all (yearly) transactions in Bitcoin can be linked to illegal activity according to Australian researchers who employed specific algorithms to analyse transaction data. As the crypto-market is still dominated by Bitcoin, with a dominance in terms of total market capitalisation exceeding 63% ($159billion), this is an important observation.
The use of cryptocurrencies for criminal purposes is not new and was already covered on 2018 study Cryptocurrencies and blockchain: legal context and implications for financial crime, money laundering and tax evasion.
Since then, there are, however, interesting developments and this study addresses these new developments. As stated in the study, in addition, and outside of the context of the use of crypto-assets in an illegal context, two notable developments are:
- the massive growth of the number of so-called private “tokens” issued on existing platforms in order to raise funds; and
- the emergence of so-called “stablecoins” and central bank digital currencies (CBDCs).
According to the study, these trends have caused various regulatory authorities, standard-setting bodies and legal scholars to shift their focus and expand their vocabulary from the term “cryptocurrencies” to the broader term of “crypto-assets”.
Overview of the study
Hereinafter a brief summary r of the main conclusions of the Study:
- With the emergence of private tokens, stablecoins, centralbank digitalcurrencies (CBDCs), regulatory authorities, standard setting bodies and legal scholars have shifted their focus in this space to provide guidance and regulatory response.
- Whilst global stablecoins may benefit financial system (eg. lower transaction fees, facilitate cross-border payments and financial inclusion), their global scale poses new challenges and risks to financial stability and monetary policy.
- With the declining use of cash, centralbanks are taking an interest in CBDC, with pilot projects being launched. More research is required before CBDCs can become game changers for payments.
- To align European AML/CFT framework with current reality, EU could consider various regulatory actions (eg. broaden virtualcurrencies definition, introduce European AML watchdog, financial regulatory framework, and cybersecurity).
- To avoid regulatory arbitrage, rulemaking on cryptoassets should ideally take place at the European level, aligned with international standards.