Max Korpusov

Cryptocurrency Regulation in the European Union: Key Insights for 2023

In todays changing landscape cryptocurrency has transitioned from being a mere speculative endeavor, to becoming a recognized asset category. This transformation has spurred governments across the globe to establish frameworks.
Notably the European Parliament recently approved a Legislative Proposal mandating that providers of cryptocurrency services acquire licenses for their operations. The primary objective of this initiative is to bolster consumer safeguards prevent market manipulation and combat illicit activities within the crypto industry.
To gain insights into the implications of these developments on the market and gain foresight, into what lies we recommend reading this article.

New rules for tracing cryptocurrency transfers in the EU

In April 2023 the European Parliament voted in favor of this Legislative Proposal, which necessitates crypto service providers to acquire an operating license.
The approval of these measures by the European Parliament represents a milestone in combating money laundering and terrorist financing. These EU crypto regulations establish a framework for the market and mandate tracing transactions to enhance transparency. By monitoring crypto asset transactions to money transfers this initiative emphasizes protecting consumers, preventing market manipulation and addressing financial crimes.
Under these cryptocurrency legislation a 'travel rule' similar to that used in finance will now apply to crypto transfers. This means that both parties involved in a transaction must retain transaction information.
From now on self hosted wallets that interact with provider managed hosted wallets need to adhere to these regulations when dealing with transactions exceeding €1000. These measures not offer increased protection, to consumers against illicit activities but also provide regulators with the necessary tools to track the usage of cryptocurrency in criminal undertakings.

What is the 'Travel Rule' for Cryptocurrencies?

Travel Rule is a regulation that was initially introduced in 1996 by FinCENs Bank Secrecy Act and later updated by the Financial Action Task Force (FATF) in 2012. Its primary objective is to combat money laundering and terrorism financing by obligating institutions to share transaction information for electronically facilitated transfers over USD/EUR 1000.
In 2018 FATF made it clear that the Travel Rule also applies to activities involving assets, including cryptocurrencies. Consequently virtual asset service providers (VASPs) now have to comply with standards as financial institutions. This entails collecting and sharing customer identification and transaction details such as names and account numbers of both senders and recipients addresses, national identity numbers, customer identification numbers, dates and places of birth transfer amounts and dates as other relevant identifying information, about the beneficiaries.
Non compliance with the Travel Rule can lead to penalties and reputational risks for VASPs (Virtual Asset Service Providers). As a result VASPs are increasingly investing in compliance solutions that allow them to meet the Travel Rule requirements and uphold their reputation and credibility in the market.

Cryptocurrency Regulation EU

Also the European Parliament has recently given its approval to EU market regulations for crypto assets, specifically crypto currencies through the introduction of MiCA (Markets in Crypto Assets Regulation). This new legal framework aims to promote transparency, disclosure and supervision of transactions ensuring that consumers are well informed about risks and costs.
Furthermore this regulatory framework will contribute to maintaining market integrity and financial stability by overseeing offers of crypto assets. It also includes measures to combat market manipulation and other illicit activities. Additionally ESMA (European Securities and Markets Authority) is expected to establish a register for asset service providers within the EU who do not comply with these regulations. Significant providers will also be required to disclose information about their energy consumption in order to address concerns regarding the impact associated with cryptocurrencies.

Current EU Crypto Taxation Rules

The current taxation rules for cryptocurrencies, across Europe vary significantly among member states, lacking an uniform approach.
In 2015 the EU Court of Justice established a precedent by considering "currencies" as equivalent to money for VAT purposes and some member states have followed this ruling. Currently the taxation of cryptocurrency assets can vary from 0% to 50% across EU countries.
In Germany exchanges between cryptocurrencies and fiat money are not subject to VAT. However when crypto is used for purchasing goods or services it is taxed accordingly. Additionally individuals engaging in cryptocurrency trading are liable for capital gains tax although there are exemptions for profits under €600 and long term holdings.
Estonia imposes taxes on cryptocurrency capital gains. Also applies VAT to crypto transactions. On the other hand Slovenia taxes income generated from cryptocurrencies. Does not tax capital gains.
Denmark treats companies like businesses when it comes to taxation but exempts private individuals from such obligations.
Spain is considering implementing tax incentives for blockchain and crypto related businesses.
Belgium applies a 33% tax on gains made through cryptocurrencies. In contrast Bulgaria has a capital gains tax rate of 10%, also there is uncertainty regarding the status of cryptocurrencies in the country.
Given the border nature of cryptocurrencies the Netherlands is advocating for coordinated EU regulations concerning cryptocurrency taxation and anti money laundering measures.

Bottom line

EUs efforts to regulate the industry will significantly impact aspects such, as consumer protection and transaction transparency.
The EU approach to overseeing cryptocurrency will develop over time, alongside the growth of the industry. These regulations mark the start of what may become an intricate process. However they will undeniably enhance the safety and security of the market for all participants. The MiCA Regulation strives to strike an equilibrium between supervision and innovation enabling the crypto sector to establish itself as a key player in mainstream finance.

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