European Union crypto regulations undermined by lack of enforcement, say observers

The European Union’s Markets in Crypto-Assets Regulation is being implemented, however, regulators are inconsistent in enforcing current legislation.

The European Union’s flagship crypto legislation, passed in 2023, goes into effect this year, while previous regulation has not been applied consistently.

According to Jon Helgi Egilsson, chairman and founder of Monerium, a licensed e-money issuer operating in the region. According to Egilsson, the new regulations—the Markets in Crypto-Assets Regulation (MiCA)—are based on the EU’s Electronic Money Directive, which has been ignored for years. Egilsson voiced concern about the overall enforcement situation and how it affects e-money enterprises in the region.

“If you issue e-money, you have to be licensed as an e-money institution,” Egilsson stated. “If you don’t, then you’re subject to fines and jail time.”

This is how Egilsson sees the situation, but as he explains, not everyone is subjected to the same level of scrutiny.

“We are competing with companies both in Europe and outside of Europe, which are doing similar things, but they haven’t received any license.”

While this may be enough to cause anxiety for e-money issuers, obtaining licensed can also bring further challenges. Egilsson stated, “As a licensed entity, you are limited in what you can do, how you can promote it, and how you can solicit it.” You must submit reports, and the regulator comes back and says, 

As a result, being a licensed issuer under regulatory supervision entails “a lot of overhead and cost.” While Monerium is closely regulated, other forms of money, such as stablecoins, are not. “I think it’s remarkable that regulators somehow allow this to happen and have been allowing this for years now,” remarked a displeased Egilsson.

A disparity in enforcement

Cointelegraph spoke with Natalia Latka, policy director and regulatory relations at blockchain analysis startup Merkle Science, to further understand why this difference in enforcement has arisen.

Latka stated that in the EU, “there are two main divergent legal viewpoints” on the regulation of electronic money tokens (EMTs) or stablecoins.

The first school of thought emphasizes the importance of the Electronic Money Directive. As Latka states, “According to this school, the EMD directly applied to EMTs before MiCA was enacted, making MiCA a regulation that does not introduce completely new rules but rather reinforces and elaborates upon the existing framework established by the EMD.”

According to Latka, this position is supported by Article 48(2) of MiCA, which expressly specifies that e-money tokens are considered electronic money, confirming the application of the EMD to EMTs. However, an alternate school of thinking within the EU appears to have influenced the regulators’ attitude.

Mica is king

The second school of thinking thinks that MiCA is the primary legislation governing stablecoins or EMTs. “Supporters of this school emphasize the significant differences between EMTs and traditional electronic money,” Latka stated.

According to regulators, stablecoins introduce new risk elements that do not exist in e-money. Self-custodial wallets are one such systematic risk element.

Another risk issue develops from global stablecoins, which may become systemic. The European Commission deemed the EMD’s measures ineffective in addressing the inherent hazards of such a situation.

Latka stated, “It’s important to note that while the commission could have regulated e-money tokens under the EMD, this option was discussed but not pursued.” Instead, a unique regulatory framework was developed to coexist with the EMD and adequately address all regulatory gaps.” The problem, according to industry insiders like Egilsson, is that while this new regulatory framework was studied, debated, agreed upon, and adopted, there has been no parity in enforcement. 

An open question

With MiCA coming into full action later in 2024 and concerned parties such as Egilsson enthusiastic about its impact, it may appear that the legal argument between stablecoins and e-money has concluded.

However, MiCA is merely the next phase in an ongoing discussion. Far more information must be worked out, which may take years.

“There isn’t a definitive answer to this debate, and it is essential that the EU authorities provide clear guidance,” Latka stated. “The sector requires greater explanations, particularly on how MiCA interacts with current EU financial legislation and directives. The interaction of MiCA with other financial laws necessitates a clear demarcation and a plan for addressing any conflicting or overlapping requirements.”

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