Initiatives like the Markets in Crypto-Assets Regulation and Transfer of Funds Regulation are paving the way for institutional adoption of digital assets, writes our Product Marketing Lead, Soelene Justus. Ultimately, they’ll protect consumers while boosting digital finance’s development, liquidity and stability, but firms in digital finance need to stay informed and agile in response to regulatory changes.
With digital assets poised to become a significant part of the global financial system, the technology behind them, distributed ledger technology, offers a transparent, highly efficient, and secure way to modernise our current systems. Until now, institutional adoption has been hampered by regulatory uncertainty. That’s changing.
Although the UK and the US have yet to substantially regulate digital assets, European legislators are paving the way for a fundamental change.
1. MiCA and TFR
The Markets in Crypto-Assets Regulation comes into effect in December 2024. Promising a harmonised regulatory environment across all member states, it covers crypto-assets, issuers and service providers.
The Transfer of Fund Regulation complements MiCA, by ensuring that the transfer of funds and digital assets carries information about originators and beneficiaries, strengthening the combat of money laundering and terrorist financing.
The adoption of MiCA and TFR across Europe marks a monumental shift for the digital assets industry. They introduce stringent rules that will impact various areas, including crypto exchanges, fund custody, and client verification processes.
Although complying with these regulations might be challenging for smaller providers, they have been designed to improve the security and transparency of crypto operations, protect the financial system and its customers, and accelerate the authorisation of new entrants and products.
One of the main goals of both MiCA and TFR is to protect users by ensuring that companies adhere to transparent audit practices and maintain verifiable records of transactions. The call for transparency has become significant following the collapse of several major crypto firms since 2020, including the crash of FTX, which exposed the vulnerabilities and risks within the industry.
By establishing clear and consistent rules, these regulations help attract significant institutional and corporate investors, boosting digital finance’s development, liquidity and stability. And the impact on the business environment is already apparent. A recent survey by Citi found that, in Europe, regulatory clarity and a range of national regulations “led to over 17% of respondents being live with offering cryptocurrencies at a commercial scale”.
2. The DLT Pilot Regime
The DLT Pilot Regime, which came into effect in March 2023 allows regulated financial institutions to experiment with the trading and settlement of digital assets in a sandbox, a controlled legal environment with only temporary waivers.
It is an example of Europe’s efforts to maintain its competitive edge in digital finance, by focusing on DLT and allowing direct access for retail investors.
The UK government recently opened applications for its regulatory sandbox, the Digital Securities Sandbox, which is not limited to DLT.
3. DORA
In parallel to MiCA, principles for crypto cyber security were introduced via the Digital Operational Resilience Act in January 2023 and will come into effect in January 2025. As a digital financial system is likely to face an increase in cyber security risks. This regulation sets out how all parties in the system should act to protect their IT systems and create resilience to new threats.
Under DORA, all crypto-asset service providers and asset-referenced token issuers are required to establish an end-to-end ICT risk management framework and provide mandatory cyber security training for their staff.
The new rules imposed by DORA are an essential part of achieving MiCA compliance. Although some organisations may baulk at the operational costs involved, DORA is another opportunity to build trust and resilience in the digital finance ecosystem.
What’s next for the EU?
Introducing these EU regulations strikes a balance between consumer protection and responsible innovation and is a vital step towards institutional adoption of this technology.
We can expect that MiCA will have an important impact beyond Europe, setting a precedent for other geographies to adopt the lessons of the ’old continent’, and as a compulsory requirement for non-EU firms selling in the single market.
Regulation indicates maturity
The future of finance is digital and will require new regulation. It should be considered a force for good because:
- It protects consumers by safeguarding investors
- It ensures market integrity by preventing the actions of bad players and the misuse of the technology
- It fosters innovation, competition and growth, by providing legal certainty for companies
Although each jurisdiction may take differing approaches to implementation, the regulatory frameworks we see in the EU highlight that DLT is reaching a much-needed new stage of maturity. As we strive for institutional adoption of blockchain, we can expect to see other parts of the world to follow suit.
As blockchain becomes institutionalised, it is vital that businesses in the digital finance space stay informed and agile in response to regulatory changes.
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