Cryptocurrency concerns vs. regulations in Europe: A guide

Editor’s note: This is part of a full article by Coinshares Research. You can read the full analysis, featuring Germany, the UK, Switzerland, Sweden, Italy, Austria, Luxembourg, and the Netherlands, here. 

The European cryptocurrency market is a constantly evolving space, with increasing investor demand, cautious but forward-looking governments and a diverse palette of regulations and concerns country by country. Here is the current intelligence of the European crypto market, from early birds through pioneers to mining havens. 

Let’s look at some data. 4% of European internet users own cryptocurrency, across 17 markets, according to the 2019 report by GlobalWebIndex. Switzerland has the highest rate of crypto ownership in Europe (among the highest in the world) and London has the highest concentration of crypto holders. The European markets with the most cryptocurrency holders also tend to have wealthier, younger online populations. 

But understanding crypto holders is only one part of the puzzle — the related governmental regulations and concerns continuously form the opportunities and limitations of the market, balancing between a future-driven attitude and a cautious approach designed to protect investors. 

Here we take a snapshot of the European crypto market, focusing on the countries that are the most active in the space, starting with the broader regional context. 

Macro view on the cryptocurrency market of Europe 

To date, the European regulatory environment for digital assets has largely been driven by individual countries, which have made their own rules, decided on their own classifications and often gone in different directions. However, the European Union (EU) has slowly but surely begun to show an increased interest in harmonising the European regulation of digital assets. 

The 5th Anti-Money Laundering and Counter Terrorist Financing Directive, known as “5AMLD”, came into effect 10 January 2020, a legislation adopted by the EU to contribute to global security, the integrity of the financial system and sustainable growth — and, as was anticipated, widened the regulatory perimeter to capture crypto, and entities dealing with crypto, through new definitions of “virtual currency” and “virtual asset service providers” (or VASPs). 

Under 5AMLD, cryptocurrency businesses are now considered to be “obliged entities”, the same as traditional financial institutions. Therefore, crypto companies are required to adhere to the same AML/CFT (Anti-Money Laundering/ Combating the Financing of Terrorism), KYC (know-your-customer) and data-sharing requirements as banks, for instance. 

Crypto providers (crypto exchanges and crypto wallet services) now have to register their businesses with local authorities in the EU, implement transparent KYC, Customer Due Diligence (CDD) and Suspicious Activity Reporting (SAR), and must be able to provide identifiable user information (name, address, etc.) to Financial Intelligence Units (FIUs) if requested. 

Some countries even implemented 5AMLD into their local laws prior to the 10 January 2020 date. An example is Finland where the country’s new regulations went into full effect in November 2019. A local crypto company, LocalBitcoins, had made the necessary changes even prior to that, in March 2019, thus becoming the first digital asset exchange in Europe to align its business to 5AMLD. The company introduced a new sign up and verification process for its users, including both individual and corporate traders. 

UK-based Bottle Pay provides a contrasting example. The crypto wallet provider, after a success story evolving throughout only a couple of months, including raising $2 million in seed funding, shut down its services in December 2019, before 5AMLD came into effect. Bottle Pay said that “the amount and type of extra personal information” they would have been required to collect from their users would have altered the user experience they provided and were not willing to force any new process onto their community. Meanwhile, as the UK was still a member of the EU at that time, it implemented 5AMLD into UK law and the Financial Conduct Authority (FCA) announced it would become the supervisor of UK crypto asset businesses. 

In the midst of and perhaps despite forming new regulations, GlobalWebIndex found that cryptocurrency holders generally appreciate anonymity. Six in ten delete cookies or use private browsing windows and they are over twice as likely as the average to be using VPNs each month, in order to hide their web browsing from government surveillance — one in two does this which is about three times higher than among the general public. 

Furthermore, in September 2020, the European Commission’s proposed Markets in Crypto-assets (MiCA) is set to open a new era for crypto legislation. It aims to create and harmonise a comprehensive regulatory framework for digital assets and their service providers across the EU. This includes any activities related to crypto assets, from issuance to provision, applying to both individuals and businesses involved. The planned regulations deal with rules of trading, marketing and supervision of digital assets, the governance of token issuers and crypto service providers, and last but not least, implementing consumer protection rules to ensure market integrity. 

Once finalised and adopted across the EU, MiCA will introduce standardised definitions for elements of the digital assets market that were previously missing and have hindered policy making by individual countries — including classifications for crypto assets, types of tokens (asset-referenced, significant asset-referenced, electronic money, utility) as well as definitions of crypto asset services and service providers. 

MiCA also includes the layout for a regulatory system for “stablecoins” as well, such as the Diem (formerly Libra) initiative of Facebook, highlighting the EU’s need for a rapid adaptation of technological progress in finance. The European Commission’s current plan, laid down in MiCA, is for the European Banking Authority to take on the supervisor role of stablecoin issuers. 

MiCA, its accompanying annex and the also relevant proposal for “on a pilot regime for market infrastructures based on distributed ledger technology” (DLTR), all published at the same time, will be transferred to the European Parliament and the Council of Ministers for review and adoption. For proposals of this complexity, a minimum of a year can pass until they take their final form. 

Over time, these EU initiatives will ultimately replace individual country regulations, which in turn, should provide operators in the digital asset space with greater certainty across a much larger market. 

Until then, at the moment, the concerns and regulations around cryptocurrencies form a colourful landscape in Europe, country by country. Below we take a closer look at some of them, to give a comprehensive picture of each crypto market and a better understanding of how crypto is shaping Europe. 

Germany: The early bird 

Germany is considered to be a pioneer in the cryptocurrency market. Based on 2019 data, 87% of the adult internet population in the country know about cryptocurrencies, 18% own them and 9.2% used to own some already in the past. 

More about the country 

The country’s crypto adoption rate can be considered fast compared to the average – one of the latest events was Boerse Stuttgart, Germany’s second largest stock exchange opening up its cryptocurrency trading platform (BSDEX) to all interested traders. Now the access to crypto is fairly easy in the country: users must be at least 18 years old, a resident of Germany, a European Economic Area (EEA) national and have a German bank account. 

Potential investors can look into several other options in the market with Bitcoin.de being the most popular and the largest Bitcoin marketplace in Europe, with over 875,000 customers. Germany also has a total of 50 bitcoin ATMs, spread around mostly in Munich, Berlin and Düsseldorf.

Regulations 

• As early as 2011, German regulator, BaFin (Federal Financial Supervisory Authority), expressed that bitcoin and related assets are “units of account” akin to artificial currencies, stating that bitcoin is not a legal currency but can be used for payments 
• Exchanging crypto into fiat (government-issued currency) and vice versa, the use of cryptocurrencies for payment and mining crypto are considered tax-free activities in Germany since February 2018 

• In 2019, Germany implemented 5AMLD expansively by defining crypto assets in its Banking Act, with crypto assets appearing in the definition of financial instruments (e-money and certain monetary values expressly excluded), introducing a new service called “crypto safekeeping” or “Crypto Custody Business” (the custody, administration and safeguarding of crypto assets), and allowing banks to sell and hold cryptocurrencies for their clients – these new rules became effective on 1 January 2020 

Concerns 

• Germany has been concerned from the appearance of crypto since the beginning, publishing more than one public warning but mostly emphasizing that crypto per se is not the problem, more so certain business activities related which may raise consumer protection and legal concerns 
• BaFin also criticized the use of the term ICOs (Initial Coin Offering) in a security context, as while IPOs (Initial Public Offering) are highly regulated and transparent, this is not often the case for ICOs, therefore BaFin regularly advises investors to have a full understanding of the related risks and potential rewards before making any investments in tokens, pressing the issues of transparency 

• BaFin has repeatedly expressed that while it does not want to block digital innovation, it is concerned with the integrity of the financial markets and investor protection — Felix Hufeld, current president of BaFin shared his views several times regarding cryptocurrencies, stating that these do not pose a risk when it comes to financial stability, however he’s much concerned with the planned cryptocurrencies of social networks such as Facebook’s Libra, in which case Hufeld has spoken about micro-economical concerns and the need for global, or at least, European regulation 

UK: The cautiously proceeding 

The UK left the EU on 31 December 2020 having agreed a last minute Trade and Cooperation Agreement with the EU. This meant that the UK left the EU with a deal, however the deal did not contain much detail on financial services. As the new year commences, we expect to learn more from the HM Treasury consultation on how the UK plans to treat crypto; as well as more detail on the on-going financial relationship between the UK and the EU. 

More about the country 

According to FCA findings, 3.86% of the UK population currently owns cryptocurrencies which amount to approximately 1.8 million adults, and 75% of UK consumers, who own cryptocurrencies, hold under £1,000. 77% bought crypto assets through exchanges and out of those, 83% use only non-UK-based exchanges. This is in accordance with the fact that none of the UK-based ones have the user base like other popular rivals such as the US-based CoinBase or Kraken. UK residents also have access to 247 ATMs in the country, with 175 reported across London. 

Regulations 

• Cryptocurrencies in the UK are not considered money or equivalent to fiat currency and there is no central bank digital currency issued yet 
• As part of the UK government’s broader fintech strategy, the Cryptoassets Taskforce was created in March 2018, with members from the FCA, Her Majesty’s Treasury and the Bank of England to explore the impact of crypto assets and distributed ledger technology (DLT) in financial services 
• According to the Taskforce, a crypto asset is a “cryptographically secured digital representation of value or contractual rights that uses some type of DLT and can be transferred, stored or traded electronically”, and the Taskforce identified its three categories as exchange, security and utility tokens 

• In July 2019 the FCA released a Guidance on Cryptoassets, a Policy Statement that considered three broad categories of crypto assets, being security tokens, e-money and unregulated tokens (comprised of exchange tokens and utility tokens) 
• On 10 January 2020, the UK implemented 5AMLD and the FCA became the supervisor of crypto businesses 
• The FCA has recently decided to ban the sale, marketing and distribution of certain crypto-based products for retail investors, coming into effect 6 January 2021, despite 97% of respondents disagreeing with the proposal 
• The UK Treasury is currently considering feedback received from a consultation to bring certain crypto assets into the scope of the UK’s financial promotions regulations. The results of this Consultation are expected to be published in the first half of 2021 

Concerns 

• The Taskforce claimed several benefits to crypto assets when they are used as a means of exchange, for investment or as a capital raising tool, but it has identified the following risks associated as well: 
  – risk of financial crime (possible use of crypto assets for illicit activities or cyber threats) 
  – risk to consumers who might be unfamiliar with such assets and can be exposed to fraudulent activity or failings of service providers, or perhaps can struggle to access related market services 
  – risk to market integrity which can lead to consumer losses or damage confidence in the market 
  – potential implications for financial stability 
• The Bank of England separately expressed a somewhat stronger opinion and concluded that crypto assets “do not currently pose a risk to monetary or financial stability in the UK” but “anyone buying crypto assets should be prepared to lose all their money” 

Switzerland: The home of Crypto Valley 

14% of asset holders in Switzerland also hold crypto which makes Switzerland the joint highest country for crypto adaptation, alongside Romania and Ireland in GlobalWebIndex’s report. 

More about the country 

Another survey recently conducted by the Swiss institute Intervista in 2020, revealed that 7% of savers, between 18 and 55, own cryptocurrencies. 13% of the youngest respondents, between 18 and 29 years old, also said that bitcoins and other digital currencies will become even more important in the future, and even 7% of those between 30 and 55 plans to continue investing in crypto. 

There are some Switzerland-based exchanges interested parties can turn to with their investments, such as Lykke or SIX Swiss Exchange — the latter is considered to be the country’s principal stock exchange which now has 12 cryptocurrency ETP listed. There’s also Swissquote Group, Switzerland’s leading provider of online financial and trading services which partnered with Luxembourg-based exchange Bitstamp in 2017, and became the first online banking group in Europe to bring direct bitcoin investing to the market. 

In addition, Switzerland has the sixth most bitcoin ATMs in the world, a total of 102 currently, mostly found in Zurich, Genève and Lausanne. 

Regulations 

• The Swiss law doesn’t define the term “cryptocurrency” or “virtual currency”, but cryptocurrencies are definitely not considered as legal tender and consequently, “money” 
• As for crypto taxation in Switzerland, for individuals, cryptocurrencies are seen as assets and subject to wealth tax, while capital gains on these assets are exempt from income tax; and legal entities must count with capital, corporate income tax and general VAT, but there can be overall differences between the cantons in the country 
• The Swiss Financial Market Supervisory Authority (Eidgenössische Finanzmarktaufsicht, FINMA) published guidelines on the regulatory treatment of ICOs in 2018 but there’s still no ICO-specific regulation to follow in the country 
• The canton of Zug in Switzerland (also known as the Crypto Valley) started accepting Bitcoin and Ether as payment for administrative costs in 2017, while Chiasso, in the canton of Ticino, started accepting bitcoin as tax payments in 2018 (with Zug set to follow in 2021), and the Commercial Register now also accepts cryptocurrencies for forming a company 
• In August 2019, FINMA published guidance on combating money laundering on the blockchain 
• In 2018, the Swiss Federal Council published a report on the legal framework for DLT and blockchain in Switzerland which then led to the creation of DLT-Draft Law in 2019, later approved by the Swiss Parliament in September 2020, and expected to come into force in 2021 

Concerns 

• The Swiss Federal Council cautions against risks in the areas of money laundering, terrorist financing, and investor protection, as one of its latest action taken was the agreement to further improve framework conditions for DLT and blockchain to increase legal certainty and reduce the risk of abuse, among others 
• FINMA closed down the unauthorized providers of the fake cryptocurrency “E-Coin” back in 2017, also issuing another general warning about the dangers of fake cryptocurrencies, including suspicious activities and unauthorized business models 
• As for consumer concerns, even many of the young Swiss are afraid of the risks of alternative investments in the form of crypto but this mostly originates from the lack of knowledge which they plan to act about 

Read the full article here.

Photo by USGS on Unsplash

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