EU Cryptocurrency Regulation

Is Cryptocurrency Legal in the EU?

Cryptocurrencies: Legal, Euro-backed member-states may be restricted on introducing their own cryptocurrencies.

Cryptocurrency exchanges: Regulations may vary by member-state, and by compliance with the European Banking Authority (EBA), European Commission (EC), European Central Bank (ECB), European Insurance & Pension (EIOPA), European Supervisory Authority for Securities (ESMA). 

EU cryptocurrency regulation varies depending on individual member states, but crypto is broadly considered legal across the European Union. Cryptocurrency taxation also varies but many member-states charge capital gains tax on cryptocurrency-derived profits at rates of 0-50%. In 2015, the Court of Justice of the European Union ruled that exchanges of traditional currency for crypto or virtual currency (and vice versa) constitute supply of services but should be exempt from VAT.
In January 2020, the EU’s Fifth Anti-Money Laundering Directive (5AMLD) came into effect. 5AMLD brings cryptocurrency-fiat currency exchanges under the scope of EU anti-money laundering legislation, requiring exchanges to perform KYC / customer due diligence on clients and to fulfil standard reporting requirements. In December 2020, 6AMLD came into effect: the directive made cryptocurrency compliance more stringent by adding cybercrime to the list of money laundering predicate offences.

EU Cryptocurrency Regulation – Exchanges

In the EU, cryptocurrencies and crypto assets are classified as qualified financial instruments (QFI’s). EU laws do not prohibit banks, credit, or investment firms from holding, gaining an exposure to, or offering services in, crypto assets or cryptocurrencies.

Exchanges that deal in QFi’s are regulated at a regional level and firms can simply rely upon their existing QFi licences in order to provide cryptocurrency-related products and services. Firms must, however, comply with an extensive range of EU cryptocurrency regulation and rules including AML/CTF, CRD/CRR, EMD2, MiFID II, PSD2, compensation, margin, deposit, and sanctions obligations.

In certain EU member states, exchanges have registration requirements with their respective regulators such as Germany’s Financial Supervisory Authority (BaFin), France’s Autorité des Marchés Financiers (AMF), or Italy’s Ministry of Finance. Authorizations and licenses granted by these regulators can then “passport” exchanges, allowing them to operate under a single regime across the entire bloc.

Following 5AMLD, 6AMLD also has consequences for cryptocurrency exchanges. The directive extends liability for money laundering offences to legal persons as well as individuals, meaning that, going forward, the leadership employees of crypto asset, currency, wallet, and exchange firms must exercise much greater oversight of their internal AML controls.

Future EU Cryptocurrency Regulations

The EU is actively exploring further cryptocurrency regulations. An EU draft document expressed concerns about the risks associated with private digital currencies and confirmed that the European Central Bank is considering the possibility of issuing its own digital currency. The EBA is concurrently promoting the adoption of a Single AML/CFT Rule Book which member states would be obliged to follow without exception.

In January 2020, the European Commission announced a public consultation initiative, seeking guidance on where and how crypto assets fit into the existing EU cryptocurrency regulation framework. The Commission followed up in September 2020 with a new proposal known as the Markets in Crypto-Assets Regulation (MiCA). The proposal sets out draft regulatory measures for cryptocurrencies including the introduction of a new licensing system for crypto-asset issuers, industry conduct rules, and new consumer protections.