Dealing with Upcoming EU Regulations: a Glimpse Into the Future

Blockchain is an ultimate disruption technology that reshapes the technological and financial landscape, providing people worldwide a new way to interact with money. The global economy is currently going through the most significant transformation over the previous millennium. New opportunities often bear unseen risks. In the modern world, risks are the stumbling stone for progress. Many projects fail to step into the light and exist in the rapidly changing legal environment. Compliance with the existing regulations may be a challenging experience for the business, but in the end — it's the only way forward. During the last few years, operations on cryptocurrency exchanges have been hampered by the weight of new legal rules, and more are certainly coming in the future. Is there a way to run the business after further improvements are introduced?

 Surviving in the ongoing changes

The new approach to regulate the chaotic market was made in September 2020, when the European Commission published the Markets in Crypto-Assets Regulation framework — MiCA. An extensive document represented the first vital step towards the unification of cryptocurrency legislation in the EU zone. Since then, the European Commission has accepted feedback from EU regulators and representatives of the crypto industry to shape legal ground further.

Every upcoming regulatory initiative is often met either with an extreme level of misunderstanding or hostility. No wonder there is a ground for such an attitude — while pursuing the goal to clean the market from fraud, such developments often hamper the operation of relatively transparent companies and bring an additional layer of challenges that not every team is ready to face. 

However, the main benefit of regulated businesses or exchanges makes it worth the trouble since the risk of losing the money in case of rug pull, exit scam, or external hacker breach almost drops to zero. The user's consciousness also remains clear since he realizes that he engages in a transparent sector of the global economy by trading on a transparent exchange rather than illegal activities. The need for high-quality user experience and services combined with the utmost safety measures has become as vital as never before. 

Unfortunately, this idea is still not supported on a mainstream level, but some examples stay out of the crowd. For example, STEX is a fully compliant spot crypto exchange supporting European AML standards. This EU-based platform offers convenient solutions and extensive trading pairs to provide an unmatched trading experience. STEX is currently supporting Bitcoin, Ethereum, USDC, and 400 more assets while platform users can buy cryptocurrencies using Visa and MasterCard and SEPA, Bancontact, and iDEAL payment systems. The platform operates under the license of the Estonian regulator and complies with KYC / AML procedures. STEX clients are verified by Cryptonomica and Fractal services.

The proclaimed goal of the MiCA initiative is “to protect consumers and ensure market integrity”. The European Parliament and Council of the European Union are considering MiCA and an additional proposal to create a sandbox for blockchain projects. However, the wording of the MiCA may change depending on the comments of financial regulators. Six months after the document's publication, the European Central Bank published an opinion on MiCa and stated the need for strict supervision over the issuers of stablecoins.

The European Commission accepts feedback on the MiCA from representatives of the crypto industry. One of the consultants to the European Commission on MiCA was the working group on blockchain and virtual currencies (BVC WG). The European Commission plans to gradually integrate MiCA into the legislation of the EU countries until 2024. In February 2021, the STEX team joined the blockchain and virtual currencies working group, which consults the European Commission on MiCA, including such well-reputable companies as Chainalysis, LocalBitcoins, and 18 other brands.

“BVC WG is an association of the most experienced and reliable crypto businesses in the European Union. Participation in this initiative became an opportunity to convey to legislators the importance of protecting users and businesses in the chaotic crypto market. It is important to protect clients from the “market participants” who establish front companies overnight, promising gold mountains, and leaving users with nothing in the end. They quickly evaporate just to resurface under a different flag on a neighboring island tomorrow. We need to isolate them from the civilized world ”, — commented the founder of STEX Vadim Kurilovich.

 Ongoing fire trials in cryptocurrency markets

Eurozone is known to be the home of tech hubs. Switzerland, Malta, Estonia — thousands of international companies have chosen these countries to establish their headquarters. 

By 2020, the Estonian authorities have issued 1,400 licenses for conducting cryptocurrency business. Estonian President Kersti Kaljulaid left her 13,000 Twitter followers confused when she tweeted: “Estonia is 1.3 million people and we have four unicorns”. 

Estonia has encouraged technological development by accepting the blockchain – being the first country to implement the technology at a government level. Blockchain has since gained substantial commercial appeal, with its ability to provide heightened security and speed up many otherwise lengthy processes. 

In July last year, Estonian regulators tightened the rules for registering cryptocurrency companies - they increased the state fee and required the physical presence of the company's offices and employees in Estonia. Back then, it resulted in a real exodus as more than 1000 companies failed to meet the new requirements and lost their licenses. This timeline was a tremendous downfall moment for many international businesses.

“At the moment, there is no ideal jurisdiction for cryptocurrency business. However, the Estonian authorities are consulting and communicating with industry representatives. This is a very different approach from countries in which the regulator is present just for the show. The stricter regulations of 2020 have revitalized the market and eliminated dormant companies. The process was not painless, but a business aimed for progress continued to work in the country, ” — notes Vadim Kurilovich.

He is confident that industry regulation is necessary to protect users of crypto exchanges:

“Regulation is primarily about protecting your customers. STEX has taken a pro-compliant position since its inception. We comply with all the regulator requirements and maintain active communication with the Estonian financial intelligence unit to explain the specifics in this market. "

In 2021, the number of STEX clients exceeded 300.000. Moreover, after the changes in the legislation of Estonia, the base of European users of the exchange increased by 250%. It may look like a surprise, but there is a ground for such growth.

“Most of the new clients are from the Netherlands, Belgium, Austria, and Germany. This suggests that residents of developed European countries trust us. We are proud to keep the license after the tightening of regulatory requirements in Estonia, ” adds the founder of STEX. He points out that compliance with regulatory requirements and the reputation of the crypto exchange allowed STEX to enter the BVC WG for consultations with the European Commission on MiCA.

 Going down the path of regulations

Many high-profile players in cryptocurrency place think that mass adoption of cryptocurrencies is impossible without industry regulation. However, it’s obvious that increased KYC/AML presence may be a double-edged sword for the clients. Such initiatives are not always welcomed by the crypto community, which is entirely free in its way of thinking and living their lives.

However, the lack of regulation is associated with several risks for users. Users can lose money due to hacker attacks, buy so-called “dirty” Bitcoins, and become victims of identity theft.

“It cannot be argued that all unregulated exchanges intend to defraud their users. Nevertheless, having a license and a regulated status is the only insurance for the user, ”comments Vadim Kurilovich.

According to the analytical company CipherTrace report, the damage from cryptocurrency scams and hacks amounted to about $ 1.9 billion in 2020, of which $ 129 million fell on unregulated DeFi protocols.

Regulated exchanges are legally liable to users. STEX processes information about exchange users following the General Data Protection Regulation (GDPR) and stores assets under the license requirements for the provision of virtual currency trading services.

STEX generates tax reporting using three smart services: Cointracking, Koinly and Zenledger to analyze transactions on the exchange, calculate and optimize taxes.

 The new hope for market

Cryptocurrencies continue to raise concerns among EU authorities. In January, the head of the European Central Bank, Christine Lagarde, called the Bitcoin a speculative asset used for money laundering. In March, the European Securities Market Authority (ESMA) warned investors about the risks of losing all funds when investing in digital assets.

Vadim Kurilovich is confident that the emergence of MiCA speaks of the readiness of EU regulators to engage in dialogue with industry representatives:

“The uniformed rules of the game are achieved only by implementation of regulations. The same goes for protecting users. MiCA is all about addressing these issues. The bill will allow the EU to form a strong economic sector — with a 'level playing field' and healthy competition. "

Nowadays, companies operating in the cryptocurrency field hope that the regulator will develop a framework that can suit all the market participants over time. For this to work, a broad open dialogue is a must in the EU zone and other countries. A better future for clients and companies in this industry is only possible if mutual consensus is achieved.