Can the EU take a pioneering role for the crypto industry?

The volatility in the stock markets, which recently caused a significant setback, did not stop at the crypto currency Bitcoin and the rest of the sector.

Recently Bitcoin had stopped itself around the range of the mark of 11.000 dollar, the recent course slide at the traditional financial markets pulled down beside gold however also the crypto currency declared by many as digital gold to the border of 10.000 dollar. However, the price has not fallen below this mark for the time being, and after a slight recovery the price is currently back in the range of 10,500 dollars.

In the long term, however, there could now be some trend-setting changes at the regulatory level, as the European Union is showing serious efforts to create international legal standards for digital currencies. On the one hand, this could mean the end for many projects, but on the other hand it could also be an enormous opportunity for the industry, which like everyone else is concerned with legal and planning security and needs regulations for further adaptation in the current financial world.

EU zone as global pioneer for the crypto sector?

In the opinion of the digital association Bitkom, for example, the ideas of the EU Commission offer good opportunities for values like Bitcoin. This could gain considerable momentum with the help of the Brussels authority’s draft, the association announced. “The EU harmonizes the existing regulatory patchwork for cryptovaluates and can thus take on a pioneering role worldwide,” said the association’s block chain expert, Patrick Hansen.

The proposals include safety nets for investors and clear regulations for operators, as the EU Commission announced on Thursday. “The future of the financial world is digital,” said Commission Vice President Valdis Dombrovskis. “Technology can offer much more to consumers and businesses and we should proactively embrace digital change while mitigating any potential risks”. The Banking Federation commented positively on the regulatory plans from Brussels.

Among other things, the new rules are intended to enable providers of crypto-currencies and corresponding financial service providers who obtain a license in one EU country to offer their services throughout the entire national community. In the banking industry, this procedure is known as the “EU passport”. In order to make digital currencies secure, among other things, there should be capital requirements for the operators and clear complaint options for investors. There are to be even stricter capital requirements for the operators of worldwide so-called “stable coins”, including the planned Facebook currency Libra. According to the EU Commission, this also applies to investor rights and supervision.

The German private banks, which are pressing for the rapid introduction of a digital euro, have commented positively on the EU Commission’s initiative. “The regulation of digital forms of currency is overdue and to be welcomed: It is a question of Europe’s digital currency sovereignty,” explained Andreas Krautscheid, Chief Executive Officer of the BdB banking association. If international providers from China or the U.S. discovered the currency as an object of economic competition, regulation would be indispensable. “At the same time, the new framework conditions must be framed in such a way that the innovative ability and digital competitiveness of the European financial sector are strengthened,” explained Krautscheid.

Bitkom expert Hansen emphasized that these steps, combined with legal security, could “attract numerous crypto companies to Europe” – but the prerequisite is an internal market in which national licenses are valid and transferable throughout the Community. “With its regulation the EU can set worldwide standards and build up a global locational advantage”, said Hansen. At the same time, he warned against too high requirements. Otherwise, he said, there is a danger that start-ups, for example, will be excluded.

The European consumer association Beuc announced that crypto currencies must be regulated throughout the EU. Therefore it supports rules on European level. In a position paper the association emphasizes its concerns. For example, there is a high risk that consumers will easily lose their investments, as well as the risk of fraud and liability issues. “Consumer protection rules must be clarified for every type of crypto asset.

Which crypto-currencies are currently most relevant and would thus be particularly affected by new regulations are listed below:

  • Bitcoin: Bitcoin is by far the oldest and most popular digital currency. It has besides with up-to-date about 60 per cent the largest market share under that at present approximately 7000 crypto currencies. Bitcoin was created during the financial crisis of 2008 and its inventor is still known today only under the alias “Satoshi Nakamoto”. The most important features of Bitcoin are its decentralized organization and the use of the “Blockchain” database technology.
  • Ethereum: The Ethereum network with the associated currency, ether, is the world’s second largest digital currency after Bitcoin. Its market share is just over ten percent. Characteristic for Ether is on the one hand the likewise decentralized organization of the underlying network Etherum. On the other hand – and this is an important difference to Bitcoin – Ether focuses on “intelligent contracts”. These so-called Smart Contracts are basically small computer programs that can execute contracts quasi automatically after payment processing. Similar to the database technology Blockchain, Smart Contracts are predicted to have a great future.
  • Tether: Tether belongs to the “stable coins”, whose value is guaranteed by the backing of classic systems. In the case of tether, it is the world’s largest currency, the US dollar. However, this violates an important idea of the crypto-currency concept, namely the independence from state institutions. Nevertheless – or maybe just because of that – Tether enjoys great popularity. One of the advantages of being pegged to the US dollar is that the exchange rate fluctuates less compared to other digital currencies. In recent years, however, there have been repeated doubts as to whether the alleged coverage with the US dollar corresponds to the facts.
  • Libra: Similar to Tether, Libra is to become a digital currency based on the principle of “stable coins”, but with two enormous differences. First: It does not yet exist. Second: Libra is backed by Facebook, one of the most powerful technology companies in the world. The idea of Libra is to bring about the commercial breakthrough of a digital currency on a broad front. The problem is that state institutions are not at all enthusiastic about it. For some time now, states and central banks have also been investigating how they can make use of the concept of digital currencies. However, they are not happy to let the scepter be taken out of their hands. The “Libra Association”, initiated by Facebook, has met with correspondingly strong resistance to its project.
  • Digital yuan: China has been working on a digital version of its currency, the yuan or renminbi, for some time now. The project is in clear contrast to the liberal ideas that the pioneers of digital currencies once had. After all, a state-controlled, decentralized currency with anonymous payment processes is certainly not what the political leadership of the People’s Republic has in mind. On the contrary, they are probably more interested in controlling payment transactions and related business as closely as possible. The digital yuan can thus be seen as a kind of counter-draft to the original crypto currency Bitcoin.