David Canellis

<div id="highlights-block_633d35fd8d5e9" class="highlights">
 <ul>
 <li>EU regulators are warning member states that the European Banking Authority will clamp down on crypto mixers and other privacy-preserving technologies</li>
 <li>Crypto asset service providers would be required to strictly monitor crypto tied to “self-hosted wallets”</li>
 </ul>
 
</div>



The European Union (EU) is preparing to warn its 27 member states of pending amped-up scrutiny of technologies that power anonymous transactions, such as <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/" target="_blank" rel="noreferrer noopener">crypto mixers</a> and privacy wallets.



In a final draft for amendments to EU regulation <a href="https://www.eumonitor.eu/9353000/1/j4nvk6yhcbpeywk_j9vvik7m1c3gyxp/vjuo7ak2n0zf">2015/847</a> obtained by Blockworks, the governing body outlines pending changes to rules dictating how member states should police the digital asset sector.



The document mostly relates to crypto asset service providers (CASPs) — such as exchanges, wallets and staking platforms — and the steps they must take to stamp out money laundering and other illicit activity in line with Financial Action Task Force directives.



Incoming stipulations tied to how EU member states must enforce the so-called “travel rule” are known — crypto entities must log detailed information on users who transact 1,000 EUR ($998) or more in digital assets per year. Know-your-customer requirements include obtaining names, addresses, countries of origin and serial numbers from passports.



Transfers involving unique digital assets, such as NFTs, should be exempt — unless specifically detailed in the incoming Markets in Crypto-Assets (MiCA) regulation.



<h3>EU financial watchdog still after ‘self-hosted’ crypto wallets</h3>



Whether these demands extend to crypto wallets not under the auspices of exchanges has been a sticking point for the EU — and a matter of contention worldwide.&nbsp;



Previous drafts of the regulation listed transfers involving products and technologies “designed to enhance anonymity, including mixers or tumblers” as “high-risk factors of money-laundering, terrorist finance and other criminal activities.”



The final draft, however, says the European Banking Authority — the EU’s primary financial regulator — “shall pay particular attention to products, transactions and technologies that may favor anonymity such as privacy wallets, mixers or tumblers.”



The new move is especially pertinent considering the US Treasury’s sanctioning of Tornado Cash earlier this year. Protocol developer Alexey Pertsev is <a href="https://www.theblock.co/post/174016/arrested-tornado-cash-developer-alexey-pertsev-appeal-rejected">reportedly</a> set to remain in Dutch jail until at least November after his appeal was denied.


<div class="wp-block-image">
<figure class="aligncenter is-resized"><img decoding="async" loading="lazy" src="https://lh4.googleusercontent.com/SBtzyW5xo6IoVDLE7QEpXpWRi1zo1ZWXfKYZp-7GU8fnAKUH7dZ_djYQ7Rtqk61_TXpEiPsOTrs2NmtreaVzzZyP5_TBiicoEbiiXeYwoMVKPhGRFkcl8ODpJG0vUkVNbtkYwTfSS3lYwDDXbdEKB1qJADxRki7gNT469tVxVJVLLZ3SiN3u9rV3og" alt="" width="705" height="303"/><figcaption>Excerpt from the final draft</figcaption></figure></div>


In the latest draft, dated Sept. 30, regulators said CASPs “should in principle not be required to verify the information on the user of the self-hosted address.”



“Nonetheless, in case of a transfer whose amount exceeds 1,000 EUR and is sent or received on behalf of a customer of a crypto-asset service provider to or from a self-hosted address, that crypto-asset service provider should verify whether such self-hosted address is effectively owned or controlled by that customer,” the draft states.



Even so, the final draft contains fresh clauses. In situations of higher risk — like interacting with self-hosted wallets — CASPs should consider applying due diligence measures,&nbsp; including identifying counterparties in a given crypto transaction.


<div class="wp-block-image">
<figure class="aligncenter is-resized"><img decoding="async" loading="lazy" src="https://lh4.googleusercontent.com/li-VD1moAfMjgevD1NCXbjglxyLnc_c2pc5K3Z2KlCR6Me903Ju7-EDYdGi5CY_-GYIc9nCsMOIAKOvyBFrKFRc_nSosDGyYoQhhzODlw3EkwDSKhWywvTkaNeklCXkAcfbmcRXPOOiNWHyNS_cDVNG2qYQnZgX6j8Oy17L8f-yAyY1_lZcyA2pMBQ" alt="" width="694" height="604"/><figcaption>Excerpt from the final draft</figcaption></figure></div>


The wording would likely require CASPs to gather additional information about where the cryptocurrencies were obtained and be subject to further monitoring.



Representatives for the EU and the European Banking Authority did not immediately return requests for comment.&nbsp;



The complete updated set of regulations will come into force 20 days after its publication in the Official Journal of the European Union. Before that happens, the European Council and Parliament must <a href="https://www.consilium.europa.eu/en/council-eu/decision-making/ordinary-legislative-procedure/">agree</a> to ratify the proposal within three separate readings, with adjustments possible in between.&nbsp;



The process lasts on average 24 to 31 months, with this particular proposal document first drafted last year.



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Leaked EU Docs Warn Members to Clamp Down on Crypto Mixers

<div id="highlights-block_6303d6b9d317f" class="highlights">
 <ul>
 <li>Crypto lobby associations are seeking clarity from EU legislators over incoming restrictions on foreign-dominated stablecoins</li>
 <li>Euro-backed stablecoins are not yet an alternative as they represent a tiny share of the crypto market</li>
 </ul>
 
</div>



Dollar-pegged stablecoins might be blocked in the European Union’s 27 countries if the bloc’s new Markets in Crypto-Assets (MiCA) legislation enters into force in its current form.&nbsp;



The European Union&#8217;s landmark crypto law has already been approved but technicalities still have to be ironed out.&nbsp;



Blockchain for Europe and the Digital Euro Association this weekend sent a letter to the EU Council, a collegiate body formed by EU member states, in a bid to reverse controversial rules which would effectively quash any large stablecoin projects tied to anything but the euro.



The crypto industry says MiCA imposes restrictions on the issuance and use of stablecoins which aren’t denominated in euros or other official currency of an EU Member State.&nbsp;



This would possibly ban Tether’s USDT, Circle’s USD coin and Binance’s binance USD, which account for an enormous chunk of crypto trade volumes globally.&nbsp;



“The three largest stablecoins by trade volume are at risk of being banned in the EU from 2024, due to quantitative limits on issuance and use of EMTs [e-money tokens] denominated in foreign currency under MiCA,” <a href="https://www.blockchain4europe.eu/wp-content/uploads/2022/08/BC4EU-Letter-on-MiCA-restrictions-to-EMTs-referencing-USD.pdf" target="_blank" rel="noreferrer noopener">both associations argue</a> in the letter.



“Restricting their use in the Euro area would cause crypto markets here to seize up, with potentially destabilizing effects and a major outflow of crypto activities outside of the EU.”



If MiCA is enforced as is, the groups reckon there could be “extreme short-term volatility in prices driven by dislocation effects” alongside higher prices and lower competition in the developing digital assets industry. The result would “drag down” innovation in the EU, they said.



Both associations seek clarification from the legislator, arguing any limitation on foreign&nbsp;currencies should be very narrow in scope.&nbsp;



In particular, they’ve requested precise definitions for “uses as a means of exchange” under MiCA to protect the role of USD-referencing stablecoins in enabling crypto trade and in liquidity provision to DeFi (decentralized finance) pools.



Patrick Hansen, EU policy expert and Crypto Venture Advisor at Presight Capital, who supports this joint letter, <a href="https://twitter.com/paddi_hansen/status/1560998733268934657" target="_blank" rel="noreferrer noopener">wrote on Twitter</a> that providing clarity “is in the EU‘s interest too, as it wants these issuers to seek a license,” which a scope too broad would disincentivize.



<h3>Stablecoins pegged to the euro won&#8217;t compete with USD-backed ones anytime soon</h3>



At the moment, European crypto investors can’t rely on euro-dominated stablecoins as they account for a small share of trade volumes.&nbsp;



“It is unrealistic to expect them [investors] to replace USD-referencing stablecoins in crypto trading, never mind doing so in a smooth manner by January 2024,” the associations wrote.



According to a June report published by the European Central Bank about the euro’s international role, the currency’s share in crypto markets is “extremely small,” just 0.2%.&nbsp;



Euro-based stablecoins are less liquid as a result and “tend to be sold similarly to other risky assets rather than behaving like a vehicle in digital transactions and trading”.



Circle’s newest stablecoin issued in euros, euro coin (EUROC), <a href="https://cms.blockworks.co/will-euro-stablecoins-like-euroc-become-mainstream/" target="_blank" rel="noreferrer noopener">launched in June</a>, gave market players some confidence in a major euro-pegged stablecoin, even if it’s not clear when it will be commonly used.



As of now, EUROC has a market capitalization of only $76 million, according to CoinGecko’s <a href="https://www.coingecko.com/pt/moedas/euro-coin" target="_blank" rel="noreferrer noopener">data</a>, ranking it the 320th largest token. For scale, dollar-denominated USDT is the third biggest cryptocurrency by market value, boasting more than $67.5 billion.



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EU Crypto Lobby Fights MiCA Limits on US Dollar Stablecoins

Casey Wagner

<div id="highlights-block_62cdb50292a37" class="highlights">
 <ul>
 <li>The ECB said crypto is increasingly threatening financial stability </li>
 <li>&#8220;Recent developments show that stablecoins are anything but stable, as exemplified by the crash of TerraUSD and the temporary de-pegging of Tether,&#8221; the report noted</li>
 </ul>
 
</div>



The European Central Bank is urging countries to act quickly on regulating the digital asset space as the industry poses increasing threats to financial stability.



In three reports published Monday, the ECB called on policymakers and member states to pass the Markets in Crypto-Assets (MiCA) law, Europe’s first attempt at comprehensive policy around cryptocurrencies, <a href="https://cms.blockworks.co/eu-members-reach-agreement-on-mica/" target="_blank" rel="noreferrer noopener">ironed out</a> in late June. The law needs “to be implemented urgently,” the EU said in its <a href="https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202207_2~836f682ed7.en.html" target="_blank" rel="noreferrer noopener">report</a> on stablecoins.



MiCA will require stablecoin issuers to maintain ample reserves and regularly update disclosure documents. The new law would also address environmental concerns around crypto by having firms report their energy usage and emissions.&nbsp;



Stablecoins specifically threaten financial stability because of their contagion risks. These types of digital assets, which either rely on reserves or algorithms to maintain value, have become an increasingly important part of the crypto industry, the ECB said.&nbsp;



&#8220;Recent developments show that stablecoins are anything but stable, as exemplified by the crash of TerraUSD and the temporary de-pegging of Tether,&#8221; the report noted.



<a href="https://cms.blockworks.co/?s=terra" target="_blank" rel="noreferrer noopener">TerraUSD</a> (UST) was an experimental seigniorage system which suffered a failure of its algorithmic stability mechanism. It was fundamentally different from centralized stablecoins such as <a href="https://cms.blockworks.co/tag/USDC/" target="_blank" rel="noreferrer noopener">USDC</a> which is backed by US dollars and short term Treasurys. It also differs from decentralized stablecoins such as DAI, which is overcollateralized — meaning that users borrowing against their crypto can borrow less DAI than the value of their locked collateral.



Lawmakers in the US have also expressed concern about the legitimacy and stability of stablecoins in the aftermath of UST’s depegging.&nbsp;



Treasury Secretary <a href="https://cms.blockworks.co/tag/janet-yellen/" target="_blank" rel="noreferrer noopener">Janet Yellen</a> and a number of prominent politicians on the federal level have urged regulators to treat stablecoins and similar digital assets like banks — which industry participants have decried.&nbsp;



“We’ve just had over this last week with Terra and with Tether an illustration of the risks associated with <a href="https://cms.blockworks.co/the-investors-guide-to-stablecoins/" target="_blank" rel="noreferrer noopener">stablecoins</a>…there can be runs,” Yellen said during a May congressional hearing.&nbsp;



Similar to the US, ECB officials encourage policymakers to take an international approach to digital asset regulation, especially as the technology continues to transcend borders.&nbsp;



“As vulnerabilities start to build, an internationally coordinated approach is needed to mitigate DeFi risks before they pose a risk to financial stability,” the ECB wrote in its <a href="https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/focus/2022/html/ecb.mpbu202207_focus1.en.html" target="_blank" rel="noreferrer noopener">DeFi report</a>. “To date, interlinkages with the traditional financial sector have been limited, but they have the potential to grow rapidly given institutional interest.”



<a href="https://cms.blockworks.co/us-regulators-release-first-of-many-reports-on-crypto-following-exec-order/" target="_blank" rel="noreferrer noopener">Earlier this month</a>, in the first of many expected digital asset reports following President Biden’s <a href="https://cms.blockworks.co/whos-in-charge-of-what-breaking-down-the-crypto-executive-order/" target="_blank" rel="noreferrer noopener">executive order</a>, a group of US regulators urged the federal government to work with other nations on crypto policy.&nbsp;



“The United States continues work on the G20 roadmap for addressing challenges and frictions with cross-border payments, including on improvements to existing systems, potential impediments from data localization and other frictions in data governance frameworks, the international dimensions of CBDC designs, and the potential of well-regulated stablecoin arrangements,” a statement from the US Treasury said.&nbsp;



The ECB also released a report on the environmental impact of cryptocurrencies, specifically when it comes to the carbon emissions related to mining tokens such as bitcoin and ether.&nbsp;



“It is highly unlikely that EU authorities will restrict or ban fossil fuel cars by 2035 (as currently foreseen) but refrain from taking action for assets whose current yearly carbon emissions are enough to negate most euro area countries’ past and target GHG emission savings, as well as the current and future global net savings from the deployment of electric vehicles,” the <a href="https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202207_3~d9614ea8e6.en.html" target="_blank" rel="noreferrer noopener">climate report</a> noted.



There is no consensus on the overall environmental impact of <a href="https://cms.blockworks.co/bitcoin-mining-economics-explained/" target="_blank" rel="noreferrer noopener">bitcoin mining</a>. For example, some applications are expected to reduce greenhouse gas emissions by <a href="https://cms.blockworks.co/exxon-mobil-powering-bitcoin-mining-pilot-using-excess-natural-gas-report/" target="_blank" rel="noreferrer noopener">using flared natural gas</a> that would otherwise be emitted into the atmosphere.



Ethereum <a href="https://cms.blockworks.co/shadow-forks-and-testnets-the-ethereum-merge-approaches/" target="_blank" rel="noreferrer noopener">plans</a> to end <a href="https://cms.blockworks.co/proof-of-work-vs-proof-of-stake-whats-the-difference/" target="_blank" rel="noreferrer noopener">proof-of-work mining</a> as soon as September, which is expected to reduce the energy associated with ether issuance by around 99.9%



In any case, the speed with which the ECB hopes to enact policy is concerning to some industry members.&nbsp;



“A ban on mining is not necessarily something bad, as long as the ecosystem has the time to prepare,” said Guilhem Chaumont, CEO and co-founder of Flowdesk, a French market-making and institutional compliance company. “Here we are talking about regulation that would be enforced in four years minimum, but there are many ongoing initiatives with regards to the transition from Ethereum to proof of stake, and things like this.”



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ECB Issues Three Reports in Effort To Pass Biggest Crypto Law in Europe

Sebastian Sinclair

<div id="highlights-block_62c51bb914107" class="highlights">
 <ul>
 <li>Purchase of Napoleon Asset Management could also help CoinShares expand product range</li>
 <li>&#8220;Our regulated status in a growing number of jurisdictions is one of CoinShares’ principal strengths,&#8221; CEO said</li>
 </ul>
 
</div>



Digital asset investment firm CoinShares said Monday it has wrapped up its acquisition of an EU-regulated crypto company, opening the door for the firm to market its products and services across the region.



Following receipt of approval from French financial regulator <a href="https://www.amf-france.org/en" target="_blank" rel="noreferrer noopener">AMF</a> on Sunday, CoinShares has picked up Napoleon Asset Management, one of the EU&#8217;s first digital asset managers regulated under the bloc&#8217;s Alternative Investment Fund Managers Directive (AIFM).



The acquisition bolsters <a href="https://cms.blockworks.co/tag/coinshares/" target="_blank" rel="noreferrer noopener">CoinShares</a>&#8216; offerings by leveraging algorithmic trading investment strategies and artificial intelligence developed by Napoleon, the firm said in a statement. The move also allows CoinShares to pursue its ambition to become a full-service digital asset investment and trading group, operating within a strong regulatory framework, it said.



As a licensed company under AIFM regulation, Napoleon is authorized to conduct business in other EU member states through what is known as &#8220;passporting.&#8221; 



Once regulated by EU member states, passporting allows a firm registered in the&nbsp;European Economic Area to operate in another state without the need for further authorization from national regulators.



The deal concludes nearly seven months of consultation with the regulator following Jersey-based CoinShares&#8217; acquisition of Napoleon in December. On Nov. 30 last year, CoinShares entered into a sale and purchase agreement to acquire the entirety of Napoleon and its subsidiaries for $14.5 million. The transaction was completed a little over two weeks later, whereby it awaited approval from the French regulator.



During that time, the EU has undergone significant regulatory changes, including a landmark approval by policymakers on the <a href="https://cms.blockworks.co/eu-members-reach-agreement-on-mica/" target="_blank" rel="noreferrer noopener">Markets in Crypto-Assets</a> (MiCA) bill last week. MiCA seeks the implementation of supervisory provisions, consumer protections and environmental safeguards, among other measures.



Policymakers also reached a deal late last month on a <a href="https://cms.blockworks.co/eu-to-require-exchanges-identify-most-crypto-transactions/" target="_blank" rel="noreferrer noopener">new bill</a> aiming to clamp down on crypto money-laundering activity by requiring exchanges and the like to collect and send customer data on transactions with no minimum threshold.



&#8220;After the recent events in the digital asset sector, it has never been more clear that strong regulation is needed for crypto to thrive,&#8221; CoinShares&#8217; CEO <a href="https://cms.blockworks.co/tag/jean-marie-mognetti/" target="_blank" rel="noreferrer noopener">Jean-Marie Mognetti</a> said in the statement, referencing recent market turmoil spurred on by crypto lender <a href="https://cms.blockworks.co/celsius-clashes-with-lawyers-over-chapter-11-bankruptcy-report/" target="_blank" rel="noreferrer noopener">bankruptcy</a> <a href="https://cms.blockworks.co/3ac-files-for-bankruptcy-as-co-founders-location-unknown/" target="_blank" rel="noreferrer noopener">filings</a> and sector-related <a href="https://cms.blockworks.co/crypto-industry-layoffs-may-have-unintended-consequences/" target="_blank" rel="noreferrer noopener">layoffs</a>.



&#8220;Our regulated status in a growing number of jurisdictions is one of CoinShares’ principal strengths; it reassures our clients and demonstrates our plans to lead Europe’s digital asset sector,&#8221; the CEO said.



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CoinShares Buys Regulated Crypto Firm, Opening Door to Fund Sales Across EU

<div id="highlights-block_62be8eb765946" class="highlights">
 <ul>
 <li>Transparency, disclosure and supervision of transactions were some of the issues agreed upon by EU policymakers on Thursday</li>
 <li>The bill at one time suggested banning proof-of-work-based cryptos, including bitcoin, though that provision was eventually removed</li>
 </ul>
 
</div>



Following years of debate,&nbsp;negotiators from the EU&#8217;s Economic and Monetary Affairs Committee finally reached a deal on how crypto should be regulated in the bloc. 



The latest update to the Markets in Crypto Assets (MiCA) bill will seek the implementation of supervisory provisions, consumer protections and environmental safeguards. 



An <a href="https://cms.blockworks.co/eus-crypto-bill-mica-heads-to-a-monday-vote-without-proof-of-work-ban/" target="_blank" rel="noreferrer noopener">earlier version</a> of the bill sought to ban proof-of-work-based digital assets, including bitcoin, though the implementation was eventually <a href="https://cms.blockworks.co/eu-committee-votes-down-anti-proof-of-work-clause-in-crypto-bill/" target="_blank" rel="noreferrer noopener">scrapped</a>.



MiCA, hotly debated since its inception in 2020, sets out the rules for how crypto and digital assets should be treated by identifying where existing financial services legislation in the EU falls short. 



The consistent treatment of digital assets across all 27 member states is the goal.



Transparency, disclosure, authorization and supervision of transactions by service providers are some of the measures covered in the new bill, with additional attention paid to protecting consumers, the European Parliament said in a <a href="https://www.europarl.europa.eu/news/en/press-room/20220613IPR32840/cryptocurrencies-in-the-eu-deal-struck-between-parliament-and-council" target="_blank" rel="noreferrer noopener">statement</a> Thursday.



The new legal framework seeks to support market integrity and financial stability by regulating public offers of cryptocurrencies and digital assets, according to the statement.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/13 Agreement between the EU institutions on MiCA: we will have a common harmonized EU-wide regime for crypto-asset issuers and service providers, that will provide security for investors and support sustainability, while to reducing fragmentation and increasing legal clarity. <a href="https://t.co/W08V2AFNef">pic.twitter.com/W08V2AFNef</a>&mdash; Ernest Urtasun (@ernesturtasun) <a href="https://twitter.com/ernesturtasun/status/1542591815546707970?ref_src=twsrc%5Etfw">June 30, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The rules around stablecoins were a key aspect of the negotiations. Ernest Urtasun of the Greens/EFA parliamentary group highlighted in a <a href="https://twitter.com/ernesturtasun/status/1542591819980087297?s=20&amp;t=ALGq4APB90JP6hnBiMEIyQ" target="_blank" rel="noreferrer noopener">post-agreement Twitter thread</a> that &#8220;large stablecoins will be subject to strict operational and prudential rules, with restrictions if they are used widely as a means of payment, and a cap of €200 million in transactions per day.&#8221;



Among those rules is one that requires issuers &#8220;to maintain reserves to cover all claims and provide redemption rights of the holders,&#8221; Urtasun wrote, adding, &#8220;the reserves will have to be legally and operationally segregated and insulated in the interest of the holder, and will be fully protected in case of insolvency.&#8221; 



That would seem to rule out algorithmic stablecoins, such as TerraUSD (UST), and place strict rules on the composition of assets backing tether (USDT).



Non-fungible tokens (NFTs) offered to the public at a fixed price in the form of cinema tickets, digital collectibles from clothing brands or in-game items in computer games will be exempt from the scope of MiCA, though that could change later down the track, the parliament said.



Measures against market manipulation and the prevention of money laundering, terrorism financing and other criminal activities will also be front and center in the EU&#8217;s new law. 



The European Securities and Markets Authority (ESMA) has been tapped to establish guidelines and oversee the crypto industry.



The EU&#8217;s latest ruling on MiCA bolsters <a href="https://cms.blockworks.co/eu-to-require-exchanges-identify-most-crypto-transactions/" target="_blank" rel="noreferrer noopener">proposed measures</a> agreed upon by policymakers on Wednesday which seek to track crypto transfers, with no exemptions for low-value transfers, on exchanges and similar platforms.



Both pieces of legislation are being touted as a means to protect consumers and fight against fraud, money laundering and terrorism financing. 



&#8220;Today, we put order in the Wild West of crypto assets and set clear rules for a harmonized market that will provide legal certainty for crypto-asset issuers, guarantee equal rights for service providers and ensure high standards for consumers and investors,&#8221; the bill&#8217;s rapporteur <a href="https://www.eppgroup.eu/newsroom/news/europe-to-become-standard-setter-in-global-crypto-market" target="_blank" rel="noreferrer noopener">Stefan Berger</a> said in a statement on Thursday. 



&#8220;So far, crypto assets, such as cryptocurrencies, have been out of the scope of European legislation and too often, divergent laws exist in member States.&#8221;



Macauley Peterson contributed reporting for this story.



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EU Members Reach Agreement on MiCA

<div id="highlights-block_62b3337464a07" class="highlights">
 <ul>
 <li>The euro is the second-largest currency in the world, but has no major stablecoin nowadays</li>
 <li>Negative interest rates have held euro stablecoins back, but the ECB&#8217;s move to raise interest rates may accellerate adoption</li>
 </ul>
 
</div>



Stablecoins are predominantly US-dollar pegged projects, but the euro is coming for its slice of the pie. <a href="https://cms.blockworks.co/circles-new-euro-backed-stablecoin-mimics-usdc/" target="_blank" rel="noreferrer noopener">Circle’s announcement</a> of EUROC (Euro Coin) last week gave experts some confidence there will be a major euro-pegged stablecoin in the near future, even if it’s not clear when.&nbsp;



“So far we&#8217;re not seeing any euro stablecoin of relevance: very low liquidity and adoption,” Fabian Scholz, co-founder and CEO of Kudona, a German-based and Lithuanian-licensed cryptocurrency exchange, told Blockworks.&nbsp;



The euro, shared by 19 European Union member states, is the second-largest currency in the world, just behind the US dollar. Despite its global market share at around 19% across various indicators of international currency use, the euro has an insignificant representation in stablecoins.&nbsp;



While the crypto ecosystem has seen capital leaving in this bear market, dollar-pegged stablecoins managed to increase their dominance as investors looked for shelter in these turbulent weeks. Notwithstanding blowups like TerraUSD (UST), stablecoins are seen as a vehicle to park value without having to cash out to fiat currency, which often incurs fees.



Until now, only a few stablecoins have been pegged to the euro, such as Tether’s EURt — a sister stablecoin to the largest dollar-backed issue, USDT — or Stasis’ EURS. Far from the scale of dollar-pegged stablecoins, EURt has a market cap of roughly $218.4 million and EURS’ market cap sits around $130.1 million, <a href="https://www.coingecko.com/en/categories/stablecoins" target="_blank" rel="noreferrer noopener">according to CoinGecko</a>.



According to a <a href="https://www.ecb.europa.eu/pub/ire/html/ecb.ire202206~6f3ddeab26.en.html" target="_blank" rel="noreferrer noopener">report published last week</a> by the European Central Bank about the euro’s international role, the share of the euro in crypto markets is “extremely small,” at 0.2%. The Eurozone’s central bank recognizes that “stablecoins pegged to the euro have started to gain popularity, although the market remains in its infancy,” but warns that “stablecoins should not be regarded as a new class of safe asset but rather as a less volatile but risky cryptoasset.”



<figure class="wp-block-image"><img decoding="async" src="https://lh4.googleusercontent.com/ZeeU744pYr9edsVZGb36OPo8j5G0yGn6s_MUMcMRmPwA1v2-AYmfDpBi40pGmQWBg-1kHhwjc15zSgzBcYOQyjiya64uVixWQ4fBy3TAuUhlHmpyHgM5zgK33Ye_N4JBKaLmGxkOed8bhv6QMw" alt=""/><figcaption>Source: ECB</figcaption></figure>



Nevertheless, Patrick Hansen, EU policy expert and Crypto Venture Advisor at Presight Capital, believes there is a rising demand for a stablecoin denominated in euro which makes up to 40% of global SWIFT payments and 20% of FX global reserves.&nbsp;



“A widely-used and liquid euro stablecoin can enable and improve a wide range of interesting use cases for European investors and businesses: from a more efficient on/off ramp to crypto/DeFi, to remittance and B2B payments, a frictionless crypto FX market and much more,” Hansen told Blockworks.&nbsp;



Kudona’s Scholz predicts that big crypto players such as Circle or Binance “might be able to change that, but they&#8217;ll need a couple of months if not two or three years of adoption to increase liquidity and adoption on the DeFi side.”&nbsp;



That would be a game-changer for European investors, as they are exposed to FX (foreign exchange) risks against the dollar. So far in 2022, the eurozone’s currency lost 11% of its value against the dollar, and some analysts predict the two currencies will reach parity later this year.



For the moment, euro-based stablecoins are less liquid and “tend to be sold similarly to other risky assets rather than behaving like a vehicle in digital transactions and trading,” according to the ECB’s research. At the same time, the institution admits that a euro stablecoin could support the currency&#8217;s international profile.&nbsp;



<h3>Monetary policy normalization may accelerate adoption</h3>



A crucial question for an issuer of a euro-based stablecoin lies exactly in ECB’s purview. With its deposit facility rate at -0.5%, the European Central Bank makes it difficult to maintain a euro-pegged stablecoin with full reserves as issuers have to pay negative interest on bank deposits.&nbsp;



<blockquote class="wp-block-quote">“Negative interest rates on bank deposits are amongst the most important barriers for the development and growth of reserve-backed, Euro-denominated stablecoins,” acknowledged Hansen.&nbsp;</blockquote>



In a <a href="https://twitter.com/paddi_hansen/status/1515694575226032135?s=20&amp;t=zOafA3Hwha_hdU43d4UtqA" target="_blank" rel="noreferrer noopener">tweet </a>in April, before Circle’s announcement, Hansen calculated that the company could have to pay €250 million in interest on its euro reserves locked at the bank if it created a euro-pegged stablecoin with a market cap of €50 billion.&nbsp;



On EUROC’s website, Circle addresses the issue: “Circle assumes the interest rate risk on Euro Coin reserves, just as we do with USDC,” the company wrote.



But negative rates are about to become a thing of the past. The ECB announced it will raise its benchmark interest rate in July as well as in September. The deposit facility will follow suit, leaving negative territory and making it easier to sustain large amounts of euro reserves at the bank.&nbsp;



“This will undoubtedly be a key change and enabler for Euro-stablecoin issuers,” predicts Hansen.&nbsp;



<h3>Will regulation hurt or benefit euro-pegged stablecoins?</h3>



The ECB’s rate hikes come at a crossroads moment for European regulation towards crypto. The European Union is <a href="https://cms.blockworks.co/eu-negotiators-want-to-hammer-out-crypto-bill-this-month/" target="_blank" rel="noreferrer noopener">close to reaching a deal</a> on Markets in Crypto-Assets (MiCA), a landmark law that will shape crypto innovation in the Old Continent.&nbsp;



“It will without any doubt have a considerable impact on the Euro-stablecoin market, and I don&#8217;t expect most Euro stablecoin issuers to be able to navigate the complex MiCA requirements to the EU&#8217;s supervisor&#8217;s satisfaction,” said Hansen, adding however that “those who do, will benefit from greater institutional trust and adoption.”&nbsp;



Market players are still waiting to see MiCA’s final version. “It&#8217;s not set in stone yet, so we need to see its final draft,” said Scholz, whose company will be affected by the regulation.&nbsp;



<blockquote class="wp-block-quote">“I&#8217;m a fan of regulation because the general idea is usually to protect the consumer, which is essential in finance.”&nbsp;</blockquote>



However, the devil might be in the details. “The question is then what kind of regulation do you have and how does it get implemented and affect businesses. If it&#8217;s well-thought-out, it allows for innovation to continue without being too constrained,” said Scholz, who not only shares a name with, but is in fact nephew to Germany’s chancellor Olaf Scholz.



Even the ECB, which is part of the financial supervisors in the eurozone, has its eye on a likely greater adoption of a euro stablecoin in the future.



“Potential risks triggered by more widespread stablecoin adoption can be managed through the existing Eurosystem’s oversight framework,” the ECB concludes, pointing to the expected MiCA regulation and international cooperation on the regulation of cryptoassets.



And in the meantime, as President Christine Lagarde <a href="https://twitter.com/paddi_hansen/status/1539284201052200963" target="_blank" rel="noreferrer noopener">recently said</a>, legislators may need to get to work on MiCA 2.0.



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Rising Rates Could be a Game-changer for Euro Stablecoins Like Circle’s EUROC

<div id="highlights-block_62a9dc972ed91" class="highlights">
 <ul>
 <li>Policymakers are optimistic about a deal in late June, but some areas of the bill are still being debated</li>
 <li>Environmental impact and anti-money laundering rules have been a source of contention</li>
 </ul>
 
</div>



European Union policymakers held another meeting yesterday in an attempt to reach an agreement on the Markets in Crypto-Assets (MiCA) bill that will shape crypto development in the European common market.



France, which currently holds the EU presidency, aims to close a deal by the end of this month, <a href="https://www.bloomberg.com/news/articles/2022-06-10/eu-aims-to-clinch-deal-on-landmark-crypto-law-this-month?utm_campaign=socialflow-organic&amp;utm_source=twitter&amp;utm_content=crypto&amp;utm_medium=social" target="_blank" rel="noreferrer noopener">Bloomberg</a> reported last Friday. MiCA has been an ongoing discussion since the European Commission first presented a proposal to the European Parliament in 2020.



The rise of crypto markets&#8217; relevance in 2021 accelerated this discussion, and France wants to achieve this milestone while they hold the presidency, which ends this month — the Czech Republic will take over the role in July.



After today’s meeting, another “trilogue” — EU’s last mile with members of the Parliament (MEPs), EU’s presidency and European Commission officials — will happen on June 30. 



The rush is real in Brussels, according to Mairead McGuinness, European commissioner for financial services and financial stability. 



“I really would like to see a political compromise on our MiCA…under the French presidency”, she told MEPs in a hearing this Tuesday, later adding that the legislation is “so urgent, given recent developments.”



The euro’s stability and investor protection were the main priorities for EU policymakers in the aftermath of problems such as the <a href="https://cms.blockworks.co/?s=terra" target="_blank" rel="noreferrer noopener">TerraUSD stablecoin collapse</a>, which, McGuinness said, “has certainly raised a lot of questions and concerns at many levels.” She also mentioned Celsius&#8217; <a href="https://cms.blockworks.co/celsius-withdrawal-halt-reveals-run-risks-on-other-crypto-banks/">pausing all transfers and withdrawals</a> earlier this week. 



MiCA will set common rules for cryptocurrency regulation in all 27 EU member states, putting European regulators at the helm of digital assets supervision across the union with the help of national authorities.



However, some issues in the legislative package have yet to be settled. According to Bloomberg, EU countries and the EU Parliament still disagree on whether to include non-fungible tokens (NFTs) in MiCA, how to regulate big stablecoins, the division of supervisory responsibilities, and the introduction of a ceiling to limit stablecoins usage as a payment method to prevent currency substitution.



Crypto’s environmental impact is yet another issue to be agreed upon. Blockchain for Europe, which represents international industry players at the EU level, claimed today that the Greens and the Socialists, two of the biggest Parliament groups, are trying to introduce amendments that will oblige all cryptoasset service providers (CASPs) to publicly disclose “info on adverse environmental impact of consensus mechanism used to issue each cryptoasset.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Update on <a href="https://twitter.com/hashtag/MiCA?src=hash&amp;ref_src=twsrc%5Etfw">#MiCA</a> ❗️ Hours before the 3rd trilogue, the Greens and Socialists are trying to introduce amendments that resemble the &quot;<a href="https://twitter.com/hashtag/PoW?src=hash&amp;ref_src=twsrc%5Etfw">#PoW</a> ban&quot; that was already voted down by the <a href="https://twitter.com/Europarl_EN?ref_src=twsrc%5Etfw">@Europarl_EN</a> Details in the 🧵below:&mdash; Blockchain for Europe (@BlockchainforEU) <a href="https://twitter.com/BlockchainforEU/status/1536693911112011783?ref_src=twsrc%5Etfw">June 14, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



“These proposed amendments do not answer the question of what happens if either a CASP or a token issuer cannot deliver on the ask. Further, it seems likely that a non-compliant actor would be banned at EU level,” the organization said.&nbsp;



Another remaining question is whether anti-money laundering rules will be included in the MiCA package or if this will be addressed in other legislation.



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EU Negotiators Want To Hammer Out Crypto Bill This Month

<div id="highlights-block_629917f2d3c27" class="highlights">
 <ul>
 <li>Cyprus’ Distributed Ledger Technology bill undergoes legal vetting after public comment period</li>
 <li>Officials are weighing the implications of passing policy before the EU releases its framework</li>
 </ul>
 
</div>



Cyprus is vetting a cryptocurrency “umbrella” bill in a bid to establish the Mediterranean nation as a premier destination for digital asset innovators and companies. 



The legislation, the Distributed Ledger Technology Bill, was published for <a href="http://mof.gov.cy/gr/%CE%B3%CF%81%CE%B1%CF%86%CE%B5%CE%AF%CE%BF-%CF%84%CF%8D%CF%80%CE%BF%CF%85/%CE%B1%CE%BD%CE%B1%CE%BA%CE%BF%CE%B9%CE%BD%CF%8E%CF%83%CE%B5%CE%B9%CF%82-%CE%B5%CE%B3%CE%BA%CF%8D%CE%BA%CE%BB%CE%B9%CE%BF%CE%B9-%CF%85%CF%80%CE%BF%CF%85%CF%81%CE%B3%CE%B5%CE%AF%CE%BF%CF%85/%CE%B4%CE%B7%CE%BC%CE%BF%CF%83%CE%B9%CE%B1-%CE%B4%CE%B9%CE%B1%CE%B2%CE%BF%CF%85%CE%BB%CE%B5%CF%85%CF%83%CE%B7-%CE%BD%CE%BF%CE%BC%CE%BF%CF%83%CF%87%CE%AD%CE%B4%CE%B9%CE%BF-%CE%BC%CE%B5-%CF%84%CE%AF%CF%84%CE%BB%CE%BF-%CE%BF-%CF%80%CE%B5%CF%81%CE%AF-%CF%84%CE%B5%CF%87%CE%BD%CE%BF%CE%BB%CE%BF%CE%B3%CE%AF%CE%B1%CF%82-%CE%BA%CE%B1%CF%84%CE%B1%CE%BD%CE%B5%CE%BC%CE%B7%CE%BC%CE%AD%CE%BD%CE%BF%CF%85-%CE%BA%CE%B1%CE%B8%CE%BF%CE%BB%CE%B9%CE%BA%CE%BF%CF%8D-%CE%BD%CF%8C%CE%BC%CE%BF%CF%82-%CF%84%CE%BF%CF%85-2021" target="_blank" rel="noreferrer noopener">public comment</a> in 2021 and is now undergoing legal vetting, Kyriacos Kokkinos, Cyprus’ deputy minister to the president for research, innovation and digital policy, told Blockworks. 



The bill focuses on clarifying policies around the digital asset industry and amends existing related laws, such as property law and tax codes.&nbsp;



“What we see as an opportunity for Cyprus and what we&#8217;re working on is to develop a new pillar of our economy,” Kokkinos said. “Through focusing on the technology sector, especially on new and disruptive technologies, like fintech and blockchain, we aim to build a new pillar of the economy that will give economic competitiveness and social prosperity.”&nbsp;



Key provisions include clarity around taxation and token issuance, plus a measure enabling the Cyprus Securities and Exchange Commission to issue related secondary legislation.



Whether the country should pass its legislation before the European Union releases its own policy is an ongoing discussion, Kokkinos said.



“Because we are members of the European Union, we will have to be very careful,” he said. “We don&#8217;t want to run ahead and regulate something then the European Union comes forward in a year with a different point of view.”&nbsp;



In an effort to coordinate policy, Cyprus lawmakers are in close contact with EU officials.



“We are fully aware of our small size, so the name of the game is collaboration with our neighboring countries, especially Greece, Israel and other geographies in the Middle East, so that we can complement each other,” Kokkinos said.&nbsp;



The plans come as countries around the world continue to grapple with how to respond to Russia’s invasion of Ukraine. Cyprus has been impacted significantly by sanctions as Russian citizens are notable contributors to the country’s tourism and banking industries.&nbsp;



Bank deposits in Cyprus held by non-eurozone residents totaled more than $6 billion in February 2022, according to the Bank of Cyprus. Before the financial crisis-induced bailout in 2013, non-eurozone deposits totaled more than $21 billion.&nbsp;



While the US and parts of Europe weigh the role that cryptocurrencies might play in aiding Russian sanction evasion, Kokkinos said Cyprus is being fully compliant.&nbsp;



“To the best of my knowledge and attention, no cryptos are being processed through Cyprus, and Cyprus is very sensitive and strict in adhering to all sanctions against Russia,” he said.



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Cyprus Looks To Become Global Crypto Hub With New Bill

<div id="highlights-block_627accf0ab28c" class="highlights">
 <ul>
 <li>The European Commission sees “minimal” DeFi contributions to the real economy but acknowledges its usefulness in the virtual economy</li>
 <li>A pilot project on rules regarding the DeFi ecosystem will be launched this year</li>
 </ul>
 
</div>



The European Union is eyeing first-time DeFi rules.



A pioneer in the development of data protection legislation through GDPR (General Data Protection Regulation), the European Commission also intends to be at the forefront of the rules that could shape a decentralized financial world.



<a href="https://ec.europa.eu/info/sites/default/files/european-financial-stability-and-integration-review-2022_en.pdf" target="_blank" rel="noreferrer noopener">In a recent report</a>, the EU’s executive arm revealed it will test an embedded form of DeFi’s (decentralized finance’s) supervision, which is now mainly unregulated, through a pilot.



“Adapting the EU financial services regulatory framework to a [decentralized] environment will require a rethink,” the report states. A pilot project on “embedded supervision” will be launched this year in order “to benefit from the inherent data transparency on public blockchains.”&nbsp;



The upshot is a tech-heavy solution in which supervisors “automatically monitor compliance with the regulatory framework by reading blockchain transaction data.” That way there is no need for market participants to “actively collect, verify and deliver data to supervisory authorities” — as is the case in the financial system now.&nbsp;



Although European regulators see innovation as an opportunity, executives also recognize “many risks” in DeFi, including “conduct and operational” perils.&nbsp;



“Conduct risks arise in the absence of any regulation and are amplified by the quasi-anonymous nature of DeFi, whereas operational risks occur in view of the vital part played by software,” the report says.



There’s also the issue of future financial stability implications arising from the rapid growth of the DeFi ecosystem “in light of the prominent role played by stablecoins.”



US Treasury Secretary Janet Yellen, meanwhile,<a href="https://cms.blockworks.co/secretary-yellen-stablecoins-pose-significant-risk-to-financial-stability/" target="_blank" rel="noreferrer noopener"> just dispatched another warning</a> about stablecoins in a Senate hearing Tuesday. 



However, the European Commission’s staff also highlights that DeFi “could potentially increase the security, efficiency, transparency, accessibility, openness and interoperability of financial services,” compared to TradFi — especially when it comes to cross-border payment settlements.&nbsp;



There’s a risk of “curtailing innovation” by deploying too heavy a regulatory hand on DeFi, regulators said.&nbsp;



Bureaucrats are leaning toward “activity-based regulation,” rather than “entity-based,” and they argue that the focus should be on smart contracts’ rules and features.



“Long-term, the capability of regulatory bodies to automatically monitor compliance by reading public blockchain data could drastically reduce the need for market participants to actively collect, verify and deliver data to supervisory authorities,” tweeted Patrick Hansen, Presight Capital’s crypto venture adviser.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">9/ Long-term, the capability of regulatory bodies to automatically monitor compliance by reading public blockchain data could drastically reduce the need for market participants to actively collect, verify and deliver data to supervisory authorities.&mdash; Patrick Hansen (@paddi_hansen) <a href="https://twitter.com/paddi_hansen/status/1521131820632494082?ref_src=twsrc%5Etfw">May 2, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



DeFi is a form of autonomous financial intermediation through a decentralized digital platform using blockchain technology, powered by open-source software. Its total value locked still represents a small slice of traditional finance.



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European Union Plans Pilot Project on DeFi Supervision

<div id="highlights-block_626956f5e7b8e" class="highlights">
 <ul>
 <li>Ruble volumes surged in March, but not to a level that causes alarm</li>
 <li>Binance, which has the bulk of the ruble trading volumes, has taken steps to comply with sanctions requirements</li>
 </ul>
 
</div>



Two months since Russia’s invasion of Ukraine provoked unprecedented international sanctions, regulators remain concerned that crypto could offer a financial loophole for Russians. In the European Union, officials are confident that no relevant evasion is occurring following an agreement between countries to clarify that cryptoassets are under the scope of sanctions.



&#8220;We are currently examining whether cryptoassets could be used by Russia to circumvent any other measure we have introduced,&#8221; a European Commission spokesperson told Blockworks. &#8220;Our feedback from the markets is that there is broad awareness&#8221; that crypto is fully covered by EU sanctions.&nbsp;



<blockquote class="wp-block-quote">&#8220;What is important now is to continue and intensify enforcement work. In this context, we will continue to constantly monitor the market situation.&#8221;</blockquote>



The major concern is whether capital outflows from Russia through crypto markets might jeopardize the sanctions&#8217; effects on its economy. If there are any indications of non-compliance, the EU’s executive arm stands &#8220;ready to adopt additional measures to limit any circumvention risks.”



At this stage, EU officials believe that market information doesn&#8217;t indicate that crypto has been used to circumvent sanctions on a large scale, Blockworks has learned. Data from CryptoCompare, a British cryptocurrency market data provider, suggests that ruble trading volumes on crypto markets spiked in March, but sank thus far in April.



Rubles predominantly trade against the USDT stablecoin, followed by bitcoin and other cryptocurrencies. When the ruble was losing value, the volume could have been affected, because Russians needed more rubles to buy the same amount of crypto than before the war.



The ruble&#8217;s value has recovered over the past month — particularly against the euro — as Europe <a href="https://www.bloomberg.com/news/articles/2022-04-27/four-european-gas-buyers-made-ruble-payments-to-russia" target="_blank" rel="noreferrer noopener">grapples with Russia’s demand</a> for natural gas deliveries to be paid in rubles rather than euros.



&#8220;In February, USDT volume dominance grew from 20.3% to 27.4% and then to 59.9% in March. This could indicate that traders were using crypto as a way to flee ruble exposure as the currency fell,” research and data analyst from CryptoCompare James Webb said. “It will be interesting to see if future geopolitical tensions lead to upticks in fiat/stablecoin pair volumes as the market matures, and investors seek to minimize this inherent risk.”



Not all observers agree that crypto is benign when it comes to effective sanctions. In an analysis seen by Blockworks, Ukrainian crypto startup <a href="https://glprotocol.com" target="_blank" rel="noreferrer noopener">Global Ledger Protocol</a>, which focus on anti-money laundering (AML) risk assessment in digital assets, describes a model of how Russians may be able to avoid sanctions through over the counter brokers and exchanges. But it isn’t clear if wealthy oligarchs could make use of crypto rails given modest transaction limits imposed by crypto-fiat on-ramps.



<h3>Governments and regulators offer few details on crypto sanctions</h3>



In the EU, sanctions are enforced directly by its 27 member nations, but authorities have their hands tied due to a lack of legislation, which is still being discussed between the European Parliament and the Council of the EU, the governing body’s legislative branch. Blockworks contacted governments and central banks in the EU&#8217;s biggest economies — Germany, France, Italy and Spain — but none revealed details of their crypto sanctions efforts.&nbsp;



The French government, which is at the helm of the EU Council through June, said it is “implementing the sanctions against Russia on all types of transferable securities, including cryptoassets.&#8221;



<blockquote class="wp-block-quote">“The aim of the EU decision is to make sure these sanctions are implemented in a unified manner,” the French Ministry of Economy, Finance and the Recovery said.&nbsp;</blockquote>



The European Central Bank (ECB) said it only assesses the prudential implications of sanctions regimes by checking if European banks have the necessary arrangements to adhere to the sanctions in place. In March, ECB&#8217;s president Christine Lagarde warned that cryptoassets &#8220;are certainly being used, as we speak, as a way to try to circumvent the sanctions.&#8221;



ECB board member Fabio Panetta reiterated the point in <a href="https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220425~6436006db0.en.html" target="_blank" rel="noreferrer noopener">a speech Monday</a> that was <a href="https://cms.blockworks.co/lawless-crypto-industry-needs-harsh-regulation-european-central-bank-exec-says/" target="_blank" rel="noreferrer noopener">broadly critical</a> of the growth in digital assets.



The Bank of Italy said there was no official data regarding crypto sanctions, and the Bank of Spain disclaimed responsibility for sanctions enforcement.



The German Bundesbank told Blockworks that &#8220;prohibitions like the ones relating to cryptoassets are directly applicable&#8221; and that &#8220;violations of related prohibitions could be prosecuted as criminal or regulatory offenses.” The German central bank revealed that it took part in a survey by the European Banking Authority (EBA) on cryptoassets and sanctions, but the results are not yet public.



“Consistent with its convergence mandate, the EBA has been collating questions from industry and national authorities regarding questions about the EU’s sanctions regime and forwarding these to the European Commission,” EBA told Blockworks.



<h3>Binance appoints global head of sanctions and applies limits to Russian wallets&nbsp;</h3>



Last week, Binance, the exchange most widely used by ruble holders with over 50% market share, created a new global head of sanctions position and began <a href="https://cms.blockworks.co/binance-to-limit-services-to-russians-following-latest-round-of-eu-sanctions/" target="_blank" rel="noreferrer noopener">restricting service</a> to high-volume Russian users.



Unlike Coinbase, a US-based custodian that froze 25,000 Russian wallets, the biggest crypto exchanges in Europe contacted by Blockworks declined to disclose any figures.&nbsp;



&#8220;eToro always complies fully with all applicable rules and regulations, which includes sanctions, and it will continue to do so,” the company said.



A Crypto.com spokesperson said the company is &#8220;aware of and in compliance with all applicable sanctions requirements.&#8221;



Binance CEO Changpeng “CZ” Zhao had previously assured that the company had a compliance task force with “world-renowned sanctions and law enforcement experts,&#8221; and he denied the idea that crypto is a feasible option to outmaneuver the West&#8217;s financial punishment.



&#8220;We are meeting sanction requirements, and crypto is not useful to avoid sanctions,” <a href="https://www.binance.com/en/blog/leadership/ukraine-russia-sanctions-and-crypto-421499824684903532" target="_blank" rel="noreferrer noopener">he said in a blog post</a>.



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Are Crypto Sanctions Working in Europe?

<div id="highlights-block_6262cc120e9ec" class="highlights">
 <ul>
 <li>Crypto custodial services were first brought under the purview of German financial regulators in January 2020</li>
 <li>European Union watchdogs are still in the process of drafting and implementing their own regulatory measures on digital assets</li>
 </ul>
 
</div>



Commerzbank, Germany’s fourth-largest bank, has confirmed it wants to offer digital assets custody and exchange services to clients, joining a growing number of conservative banks in Europe moving into digital assets.



Bernd Reh, a Commerzbank senior spokesman, confirmed to local media <a href="https://www.boersen-zeitung.de/banken-finanzen/commerzbank-beantragt-krypto-verwahrlizenz-303b9c3a-bbeb-11ec-8e62-5f7cf1d225cc" target="_blank" rel="noreferrer noopener">Börsen-Zeitung</a> last week that the bank applied for a license in January from BaFin, Germany’s Federal Financial Supervisory Authority, and that the bank would first focus on institutional customers. The banking giant currently has 70,000 corporate and institutional clients worldwide.



“Where traditional and large banks until very recently have seen crypto as competition and shied away from it, we now start to see adoption even from some of the most conservative players in the banking field,” Mikkel Morch, executive director at crypto hedge fund ARK36, said. Commerzbank, which had some 541 billion euros ($583 billion) under management in late 2021 according to its latest financial statement, has been working on several blockchain projects since 2018.



In January 2020, Germany introduced crypto custody into the German Banking Act as a new financial service. “Crypto custody business is also subject to the notice issued by [the German central bank] Deutsche Bundesbank on the granting of authorization to provide financial services,” BaFin says on its website dedicated to crypto licensing.&nbsp;



The regulator is also cracking down on unauthorized activity. Recently, the supervisory authority opened investigations into several crypto services companies that have not been granted authorization to operate in the country. If found guilty, individuals involved could face up to five years in prison.



Authorities and legislators in the European Union are still in the process of building regulatory regimes, but some, such as those in Germany and Portugal, already have registration procedures in place.



And traditional banks are increasingly applying for crypto licenses in Europe, including in Portugal, where <a href="https://www.securities.io/portugals-bison-bank-granted-the-license-to-offer-crypto-custody-services/" target="_blank" rel="noreferrer noopener">Bison Bank</a> last week became the first authorized bank to receive a crypto license from the country’s central bank.



Last July, Coinbase was awarded Germany’s <a href="https://blog.coinbase.com/coinbase-secures-first-crypto-licence-in-germany-8a5207fbc03b" target="_blank" rel="noreferrer noopener">first crypto license</a>. A <a href="https://cms.blockworks.co/report-germany-is-the-most-crypto-friendly-country/" target="_blank" rel="noreferrer noopener">report by Coincub</a> last week ranked Germany as the most crypto-friendly country.



Added Morch: “These moves can be interpreted as the beginnings of a race within the traditional banking field to gain a competitive edge by being the first entity in its local market to offer crypto services.”



As a result, crypto adoption will increase, he believes, and it will be a mainstream financial service – instead of the “next big thing.”



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German Banking Giant’s Move into Crypto Highlights Growing Trend in Europe

Ben Strack

<div id="highlights-block_6245ad3087822" class="highlights">
 <ul>
 <li>The proposal called for crypto firms to reveal info about the sender and receiver of crypto transfers</li>
 <li>Coinbase executive said the measures would unleash a surveillance regime on exchanges, stifle innovation and undermine self-hosted wallets</li>
 </ul>
 
</div>



Two European Parliament committees have voted in favor of measures requiring crypto companies to collect and share data on certain transactions.



The Committee on Economic and Monetary Affairs and the Committee on Civil Liberties, Justice and Home Affairs <a href="https://www.europarl.europa.eu/cmsdata/246608/ECON-LIBE%20Voting%20Session%20-%2031%20March%20(amendments)%20RESULTS.pdf" target="_blank" rel="noreferrer noopener">voted</a> to expand anti-money laundering requirements in the crypto space.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">BREAKING: The ECON &amp; LIBE committees of the EU Parliament voted in favor of the FTR compromises D &amp; E that crack down on “unhosted” wallets. Entire regulation draft to be voted on later today, but will certainly go through. Breakdown of the vote &amp; more updates in this thread.&mdash; Patrick Hansen (@paddi_hansen) <a href="https://twitter.com/paddi_hansen/status/1509536318585454597?ref_src=twsrc%5Etfw">March 31, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Spokespeople for the committees did not immediately return a request for comment.



European Union ambassadors <a href="https://www.consilium.europa.eu/en/press/press-releases/2021/12/01/anti-money-laundering-council-agrees-its-negotiating-mandate-on-transparency-of-crypto-asset-transfers/" target="_blank" rel="noreferrer noopener">agreed on a mandate</a> in December to negotiate with the European Parliament on a proposal to extend the scope of fund transfer rules to include certain cryptoassets.&nbsp;



The proposal aimed to require crypto service providers, such as exchanges, to collect and share information about the sender and beneficiary of these asset transfers — a practice that payment service providers currently do for wire transfers.



Legislators hoped to ensure traceability of transfers between crypto service providers and so-called “unhosted wallets” so as to be able to better identify possible suspicious transactions and potentially block them.



An unhosted wallet is a term used by the <a href="https://www.fatf-gafi.org/" target="_blank" rel="noreferrer noopener">Financial Action Task Force</a> and <a href="https://www.fincen.gov/" target="_blank" rel="noreferrer noopener">Financial Crimes Enforcement Network</a> and adopted by other government and regulatory bodies. It means that an individual maintains their own private keys — known in the crypto industry as a “wallet” or “self-hosted wallet” to delineate between assets controlled by a financial institution acting as a custodian and an individual.



Requirements to check if the information on the payer or payee is accurate is to be imposed on crypto transfers that exceed 1,000 euros, according to <a href="https://www.europarl.europa.eu/doceo/document/CJ12-PR-704888_EN.pdf" target="_blank" rel="noreferrer noopener">a draft report</a>.



Slovenian Finance Minister Andrej Šircelj said in December that the proposal was an important step toward “closing the gaps in our financial systems that are malevolently used by criminals to launder unlawful gains or finance terrorist activities.”



Markus Ferber, who has served in the European Parliament since 1994 and is a member of the European People’s Party (EPP), took to Twitter Thursday to share his opposition to the proposal.



“We need to take AML risks in crypto seriously, but should not ban unhosted wallets,” Ferber tweeted. “This would be the equivalent of banning cash — unnecessary and disproportionate!”



Fellow European Parliament member Paul Tang responded to Ferber’s tweet, noting that passing the proposal would not ban anything.&nbsp;



“Instead we oblige verification to prevent crime and corruption through unhosted wallets,” Tang wrote. “Crime and corruption aren&#8217;t innovation, I&#8217;m sure a law-and-order party like the German EPP would agree?”



Paul Grewal, chief legal officer at crypto exchange Coinbase, wrote in <a href="https://blog.coinbase.com/making-your-voice-heard-ahead-of-thursdays-critical-eu-vote-f03730e83e5c" target="_blank" rel="noreferrer noopener">a March 27 blog</a> that “bad facts make bad law,” noting the EU’s upcoming vote.



“If adopted,” he wrote, “this revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets.”



Patrick Hansen, head of strategy and business development at Unstoppable Finance, said in a Twitter post that formal meetings about these measures, known as “trilogue,” could take a couple of months.&nbsp;



“We have lost a battle, but this is far from over,” he said.



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EU Parliament Committees Vote To Crack Down on Crypto Transfers

<div id="highlights-block_62301fd6c7257" class="highlights">
 <ul>
 <li>A controverial section of the EU&#8217;s crypto draft bill has been voted down by the bloc&#8217;s economic committee</li>
 <li>Voting witnessed 23 votes in favor to 30 votes against, with a further six abstaining</li>
 </ul>
 
</div>



The EU Committee on Economic and Monetary Affairs (ECON) has voted against the implementation of a controversial clause that <a href="https://cms.blockworks.co/eus-crypto-bill-mica-heads-to-a-monday-vote-without-proof-of-work-ban/" target="_blank" rel="noreferrer noopener">some say possessed teeth</a> to effectively ban proof-of-work coins, including bitcoin.



ECON&#8217;s <a href="https://www.europarl.europa.eu/cmsdata/245802/ECON%20VS%2014%20March%202022%20(amendments)%20RESULTS%20(002).pdf" target="_blank" rel="noreferrer noopener">voting session</a> on Monday witnessed 23 votes in favor of the <a href="https://cms.blockworks.co/eus-crypto-bill-mica-heads-to-a-monday-vote-without-proof-of-work-ban/" target="_blank" rel="noreferrer noopener">Markets in Crypto Assets</a> (MiCA) draft legislation&#8217;s clause to 30 votes against, with a further six abstaining.



Specifically, the clause sought to subject the use of the crypto industry&#8217;s <a href="https://cms.blockworks.co/proof-of-work-vs-proof-of-stake-whats-the-difference/" target="_blank" rel="noreferrer noopener">proof-of-work</a>-based digital assets to &#8220;minimum environmental sustainability standards.&#8221; 



Language in the bill also included a measure to &#8220;set up and maintain a phased rollout plan to ensure compliance with such requirements.&#8221; 



The wording was a revision to the bill which previously sought to establish a framework prohibiting crypto services from utilizing proof-of-work-based cryptos altogether.



Some, including Unstoppable Finance’s head of growth Patrick Hansen, viewed the language, including its revised wording, as &#8220;essentially the same&#8221; as a ban on bitcoin.



Lawmakers across the continent have been pushing for regulation on crypto mining, concerned proof-of-work is an energy-intensive crypto activity deemed &#8220;unsustainable&#8221; in light of the legislation&#8217;s aims.



Introduced in 2020, MiCA seeks to tighten regulation around digital assets by establishing a licensing regime on the continent and streamlining a uniform set of rules for the bloc&#8217;s 27 member states.



MiCA is part of the EU&#8217;s Digital Finance package that is attempting to &#8220;further enable and support the potential of digital finance in terms of innovation and competition while mitigating the risks.&#8221;



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