Europe takes lead over US on crypto regulation

Born out of the desire to create a decentralised currency not controlled by a government, the crypto movement has long resisted regulation.

But those days may be numbered as the EU recently adopted comprehensive rules regarding crypto assets, taking a lead over the United States, which has meanwhile cracked down on two major crypto exchanges.

In April, the European Parliament adopted by a wide margin the Markets in Crypto-Assets (MiCA) regulation and it received final approval by the Commission last month.

The first comprehensive regulation of the sector, MiCA aims to reduce illegal practices including money laundering as well as protect investors and consumers.

It covers issues of crypto assets as well as trading venues and providers of the "wallets" where investors hold their assets.

"MiCA brings clarity, said Jerome Bailly, vice president of Crypto Valley, an association which supports the crypto industry in Switzerland.

"We're no longer in the Wild West era and what everyone wants in the industry is the rules of the game," he told AFP at an event supporting startups.

Bailly said that while everyone was initially hostile towards MiCA, "finally it has become a selling point for Europe" as it fixes a clear framework for companies which can then organise their business operations accordingly.

He believes a "European bloc" will emerge, with the Britain and Switzerland following the EU's lead to create a regulatory zone.

- US litigation fears -

On the other hand, "the signals coming from the United States are clearly negative," Bailly warned.

US crypto firms were weakened by the failures of Signature Bank, Silvergate and Silicon Valley Bank, which were key institutions in financing of the larger tech sector and startups.

Plus, US authorities have begun to turn the screws on the sector since the failure of the FTX and Genesis exchanges, charging the world's top cryptocurrency exchange Binance with securities law violations, as well as its rival Coinbase.

In February, the California-based exchange Kraken received a large fine from the Securities and Exchange Commission, which regulates trading in securities, for not having registered its services.

The US regulatory uncertainty is a difficulty for companies, said Bailly, as debate rages in the United States whether the crypto should be treated as financial assets and therefore be regulated by the SEC, or whether they should be considered as commodities and therefore overseen by the Commodities Futures Trading Commission (CFTC).

"We see that a lot of companies are fleeing the US for Europe," said Thomas Naegeli, a lawyer based in Liechtenstein, with more and more European firms staying away until it becomes clear who is responsible for regulating the sector.

"They don't get clear answers and there's this fear that they will end up being sued by the regulators," Naegeli said.

"As an entrepreneur you don't want to calculate potential litigation cases for decades into your budget."

- 'Openly negative' attitude -

While Europe may be making advances now, the United States remains the biggest market, noted the lawyer, so it is important they resolve the regulatory situation quickly.

"That's what companies want," Naegeli said.

At the end of May, Peter Smith, the head of the London-based exchange BlockChain.com, lambasted the "openly negative" attitude of some US regulators towards crpyto.

"Thousands of incredibly talented people have left the US to move to other jurisdictions in the past year" for countries with a "constructive" approach to regulation.

"France, Portugal, the United Arab Emirates, Singapore, Hong Kong, London, increasingly and interestingly, have all been very excited to take up the slack that the US has created," Smith said at the Qatar Economic Forum.

Martin Hiesboeck, head of research at the Uphold exchange, said all the noise was to prompt US authorities to clarify the rules of the game.

"Nobody really wants to leave America," Hiesboeck said.

"They just want to put out some messages to put pressure and to make sure that American legislators realise that if they do not regulate properly they will lose millions of business, jobs and revenues," he added.

At the beginning of June, Republican lawmakers submitted a bill which Hiesboeck hopes will serve to open a debate with Democrats on regulating the sector.

"I always say that America sometimes take longer but... they often have better regulation and the world pays more attention to their regulation than anybody else," Hiesboeck said.