The EU’s Move to Improve Crypto Asset Tracing

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Angelika Hellweger of Rahman Ravelli outlines the European Union’s measures to enhance the integrity of the crypto asset sector.

MEPs have approved the first European Union (EU) legislation for tracing the transfer of crypto assets.

This legislation is part of a package of approved measures that will:

  • Ensure that transactions involving crypto assets will be traced in the same way as traditional money transfers.
  • Create a uniform legal framework for crypto asset markets in the EU.
  • Provide enhanced consumer protection and safeguards against market manipulation and financial crime.

The measures are seen as a step forward in the EU’s attempts to prevent money laundering and ensure greater transparency, supervision and customer protection. However, it also means an increased compliance burden and more costs for crypto asset providers when implementing these measures.

The text of the legislation relating to transaction tracing had been provisionally agreed by the European Parliament and the Council of the European Union’s negotiators in June 2022. It aims to ensure that crypto transfers can always be traced and transactions blocked if they are suspicious, as is the case with traditional financial transactions. This will mean that information on both the source of the asset and its beneficiary will “travel” with the transaction and be stored on both sides of the transfer.

The law will also cover transactions of more than €1000 from self-hosted wallets (a crypto-asset wallet address of a private user) when they interact with hosted wallets managed by crypto asset service providers. The rules do not apply to person-to-person transfers conducted without a provider or among providers acting on their own behalf.

Final approval has also been given to new common rules on supervision, consumer protection and environmental safeguards relating to crypto assets, including cryptocurrencies (MiCA). This draft law includes safeguards against market manipulation and financial crime and will cover crypto assets that are not regulated by existing financial services legislation.

Key provisions for those issuing and trading crypto assets (including asset reference tokens and e-money tokens) relate to the transparency, disclosure, authorisation and supervision of transactions. The aim is to ensure consumers are better informed about the risks, costs and charges linked to transactions, while also strengthening the market integrity and financial stability of crypto assets.

Measures have been agreed to tackle market manipulation and to prevent money laundering, terrorist financing and other criminal activities. To counter money-laundering risks, the European Securities and Markets Authority (ESMA) will set up a public register of non-compliant crypto asset service providers that operate in the European Union without authorisation.

These measures will now have to be formally endorsed by the Council before publication in the EU Official Journal. They will enter into force 20 days later. MICA is expected to take effect sometime in 2024.

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