The EU will set up a new college of supervisors, including national and European authorities, to oversee “significant” digital currencies including Facebook’s Libra, according to the European Commission’s cryptocurrency draft proposal seen by EURACTIV.
The long-awaited regulation will address the high volatility of cryptocurrencies including Bitcoin, the most popular of these digital tokens, and the risks posed by systemic ones, like Libra.
With the 167-page draft text, expected to be presented in the coming weeks, the EU will become the first major jurisdiction to regulate cryptocurrencies.
“I believe that Europe is in a position to lead the way on regulation,” said Valdis Dombrovskis, the Commission vice-president for financial services in comments made back in June.
For some, cryptocurrencies are seen as the “money of the future”, because they offer an almost instant payment system with very low fees.
But they are also a primary target for speculators and money launderers. And authorities are especially concerned about digital tokens backed by sovereign currencies, known as ‘stablecoins’, which includes Facebook’s Libra.
Because they are tied to national currencies, supporters of ‘stablecoins’ claim they can avoid the bubble-and-burst evolution seen with Bitcoin. But regulators fear they could destabilise the global economy, especially if they have the potential to reach 2.7 billion users around the world, like Facebook’s pet project.
“We will not accept that Libra is transformed into a sovereign currency that can endanger financial stability,” French finance minister Bruno Le Maire told EURACTIV in July last year.
The Commission’s proposal will come after almost two years of slow progress. But as EU officials admitted, “Libra was a ‘wake-up call’ to take seriously” these digital tokens.
The goal of the new rules is to provide legal certainty, support innovation, protect consumers and investors, ensure financial stability and market integrity, the document says. The need to regulate at EU level has also become more urgent given that some member states have started designing their own rules, including Germany, France and Malta.
The Commission proposal, however, will not cover the digital currencies that central banks are currently developing.
The draft proposal imposes lighter requirements on cryptocurrencies that pose lower risks. But rules will be stricter for “significant e-money tokens”, in terms of obligations, supervision or the sanction regime.
By tailoring the legislation to the level of risk, the Commission expects to foster a market worth around $350 billion, and spread over more than 6,700 digital currencies, while addressing the potential challenges that these digital assets could bring.
Cryptocurrency developers should produce a ‘white paper’ with all the relevant information about the issuer, the token or the trading platform “to enable potential buyers to make an informed purchase decision and understand the risks relating to the offering,” the proposal says.
National and European regulators must approve these documents before issuers can start operating.
For the Libra Association, and issuers of ‘significant e-money tokens’, the path will be more difficult as they will also have to become a credit institution or an electronic money institution, facing stricter requirements compared with other digital operators offering financial services.
As a result, Libra and other ‘significant e-money tokens’ will fall under the supervision of the European Banking Authority. But the Commission will add an additional body, including national and European supervisors, to assist EBA in overseeing these systemic digital assets.
The EBA will chair this college of supervisors and will include, among others the national authority of the member state where the issuer of the significant e-money tokens has been authorised, the European Securities and Markets Authority (ESMA), the ECB or any other EU central bank, depending on the sovereign currency backing the digital token.
The EBA must “duly consider” the non-binding opinions of the college, the draft text says, which could include requesting issuers to hold more of their own funds or the revocation of the authorisation in case of serious breaches of their obligations. If the EBA doesn’t agree with the college opinion, it should explain any significant deviation from the recommendations.
Fines and fees
The EBA will also have powers to conduct investigations, on-site inspections, and impose fines of up to 5% of the issuers annual turnover, or twice the amount or profits gained or losses avoided by these systemic cryptocurrencies thanks to the infringement.
In order to finance its expanded supervisory role, the banking regulator will charge fees to the issuers of these significant cryptoassets.
The draft text also obliges the Libra Association and the issuers other significant e-money tokens, to redeem, at any moment and at par value, the monetary value of the e-money tokens if the holders decide, either in cash or by credit transfers. The rules also impose the prohibition of granting any interests to holders of these digital assets.
(Edited by Frédéric Simon)