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Crypto Weekly: The European Union cautious towards crypto

Mads Eberhardt

Cryptocurrency Analyst

Summary:  Within a month after rejecting a proof-of-work ban, the European Union voted last week in favor of new harsh regulation on non-custodial crypto wallets. The regulation can highly impact the crypto market in the EU. Speaking of proof-of-work, under 2mn Bitcoins are left to be mined.


The European Union votes in favor of new harsh crypto regulation

In March, the European Union parliament voted to reject a proposed ban on the consensus protocol proof-of-work used in Bitcoin and for the time being Ethereum. However, last week the parliament sent a clear message that the union is beyond doubt in charge of crypto regulation within its borders. Here, the parliament voted to support other regulation of the industry. As it stands, this regulation is focused on non-custodial wallets. In short, these are wallets held completely decentralized with no intermediary having access to the funds. The European Union is not planning to ban them, but it is planning to regulate them somewhat harshly.

In brief, the EU wants custodial wallets e.g., exchanges to verify the ownership of the receiving non-custodial wallet before initiating a withdrawal. For instance, if you are withdrawing 0.1 Bitcoin directly to your friend from an exchange, the exchange in question must verify the identity of your friend, no matter whether your friend is a client of the exchange. As this is too time-consuming and not feasible, the exchanges will likely only support the withdrawal of crypto assets directly to non-custodial wallets that can be verified to be owned by the client in question. This will complicate the interaction with crypto not only for exchanges but also for users. The enhanced complexity for exchanges means that minor companies might not be able to comply with the legislation, ultimately limiting competition within the EU. It is important to notice that due to the public nature of cryptocurrencies, the identity of users can often easily be linked to their respective crypto addresses without explicit regulating exchanges to verify the ownership. Mainly due to the transparency of crypto, according to Ledger, money laundering is 232 times less likely to occur through crypto than in fiat currencies.

Further, exchanges, brokers, and other intermediaries will be required to report crypto deposits of EU residents worth over 1,000 EUR to the respective AML authorities. This means that many crypto users will over time appear in crypto databases belonging to the European Union. In this case, let us hope that these databases are safer than the ones of other European Union agencies such as the European Medicines Agency, which was hacked in December 2020 alongside other recent breaches of e.g., the European Commission. In late March, the European Court of Auditors even warned against the overall cybersecurity of EU agencies.

On an additional note, the EU also wants to ban crypto companies from interacting with decentralized finance protocols. For instance, this presumably means that an exchange will not be allowed to lend out its client’s assets on decentralized protocols, which will further limit innovation within the EU.

It is important to notice that the above legislation now moves to the trialogues, in which European Union members can voice criticism and elements of the regulation can be changed. After that, crypto companies will likely have to comply with the legislation by early 2024. This means that it is not sure that the above legislation will be the final result.

However, concluding on the present legislation, as we see it, this regulation will solve challenges that are either non-existing or which can be solved with less harsh regulation. For now, this legislation merely makes it more complicated for everyday people to interact with crypto and limits competition and innovation within the EU. While we are genuinely an advocate for further regulation on crypto, the regulation should also be proportional to the challenges it is supposed to solve. For comparison, it seems that the US with President Biden’s recent executive order on the regulation of cryptocurrencies are looking to find a greater line between regulation and its consequences to support innovation.

BNY Mellon to custody USDC reserve

One of the world’s largest custodian banks, Bank of New York Mellon, otherwise known as BNY Mellon, has been chosen by Circle, the issuer of the second-largest stablecoin USDC to be the primary custodian of its reserve backing the $51bn stablecoin. Circle is regularly being audited by accounting firm Grant Thornton to ensure that its stablecoin is fully backed. At its latest audit in October last year, Grant Thornton declared that Circle’s reserve at the time of $33bn was in cash or cash equivalents. It is these assets that BNY Mellon will now be the primary custodian of. Based on the growth of USDC, it is likely that the reserve does not remain at $51bn. Since the beginning of last year, the supply of USDC has grown from $4.1bn to the present supply of $51bn.

Under 2mn Bitcoins left to be mined

Last week the largest cryptocurrency Bitcoin hit a milestone with the 19thmn Bitcoin mined out of the maximum of 21mn Bitcoins to enter circulation. Retrieving the old physical calculator at the rearmost in the drawer, the calculator will correctly claim that under 2mn Bitcoins is then to be mined. Whereas Bitcoin spent slightly more than 13 years to mine the first 19mn Bitcoins, it is estimated that the last Bitcoin will not enter circulation before the year 2140. This is due to the mining reward halving occurring every 4th year. In May 2020, the latest halving cut the mining reward of 12.5 Bitcoins to 6.25 Bitcoins. At the next halving in 2024, the mining reward will be reduced to 3.125 Bitcoins.

Bitcoin/USD - Source: Saxo Group
Ethereum/USD - Source: Saxo Group
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