2023 turned out to be a transformative year for the crypto arena. Regulators all around the world ramped up efforts to bring about a set of formal laws for digital currencies. After the United States took some harsh actions against the major crypto players, the world realised the importance of working in accordance with the laws prevailing in the particular land. This year marked some legislative initiatives taken by the significant crypto players in the world. Europe became the hub! The most recent set of crypto rules laid by Europe include an amalgamation of safety and transparency. These regulations aim at bringing stability in crypto trading in Europe. In this article, Coinpedia has penned down some of the remarkable legislative developments in cryptocurrency in Europe!
Introduction
New regulations in the European Union have set a benchmark for other regions. After a two year negotiation period, the European Council and Parliament agreed on the Markets in Crypto-Assets (MiCA) proposal to look after the digital asset businesses for the first time.
In the European Union, cryptocurrencies are legal! However, crypto exchange regulations depend on individual member states. Crypto taxation also varies according to different states. This year, the new regulations have been passed to help the market in building credibility and a more suitable environment for the traders. If one wishes to know everything about the crypto regulations in the European Union, this step-by-step guide is the ultimate guide for you!
Market Analysis in Europe
- Central, Northern and Western Europe (CNWE) is the second largest crypto economy in the world in 2023.
- In April 2023, the EU Parliament passed the Markets in Crypto Assets Act (MiCA) for crypto assets within the European Union.
- According to Chainalysis, Europe’s growth was largely driven by “whales”.
- Europe has the world’s largest crypto economy, collecting $1 trillion in 2023, which amounts to 25% of all crypto activity worldwide.
- In Europe, different countries are exposed to a different approach when it comes to crypto legalization and usage.
- Almost 1000 crypto entities registered in the EU in 2023.
- The largest crypto market in Europe is Germany.
- The most popular choice is Bitcoin among the Europeans! It is closely followed by Ethereum , NFTs and Metaverse projects.
| Country | Crypto Scenario |
| Luxembourg | First BitLicense issued in October 2015 |
| Norway | The tax administration did not classify Bitcoin as currency but rather an asset in 2013. Wealth tax applied on profits. |
| Switzerland | Bitcoin businesses regulated by anti-money laundering laws A report on virtual currencies issued in 2013 by the Swiss Federal Council.Unlike many other countries, Switzerland categorizes cryptocurrencies as an asset class rather than a security.The country’s financial regulatory authority, the Swiss Financial Market Supervisory Authority (FINMA), governs all matters regarding virtual currency regulation and other digital asset services like decentralized finance (DeFi). |
| The United Kingdom | Since 8 October 2023, firms wishing to promote crypto assets in the UK to retail consumers must, by law, be authorised or registered by the FCA, or have their marketing approved by an authorised firm. |
What is MiCA?
- With the implementation of MiCA, Markets in crypto Assets regulation, the EU took a big step in the world of cryptocurrencies.
- The MiCA regulation is a comprehensive framework curated to control activities and services associated with crypto assets within the EU.
- It substitutes individual legislation from member nations with a set of guidelines, giving crypto-asset service providers and token issuers clarity and security.
- The individual national regulatory agencies will be responsible for enforcing the law, and the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) will have the authority to supervise and conduct investigations.
- The introduction of the MiCA regulation in 2024 is going to be a game-changer in determining the direction of cryptocurrency legislation.
- The ground-breaking law is designed to help in ensuring safer and more regulated digital finance space.
- It divides crypto-assets in three sub-categories: e-money, asset-reference tokens and all other crypto assets.
- MiCA will subject issuers of large stablecoins to strict rules, including maintaining reserves to cover all claims and providing immediate redemption rights to holders. There will also be a limit on €200 million ($208 million) in transactions each day as part of restrictions if stablecoins are used widely as a means of payment.
Germany At A Glance
Number of crypto users: 4.9 million (5.8% of the population)
Cryptocurrency is legal in Germany! Germany, being Europe’s largest economy, needs to be considered while chalking down the crypto scenario in Europe. Cryptocurrency is gaining popularity with firms offering a wide range of services like brokerage, trading, custody, staking, and CeFi-DeFi bridging.
German government has been working on regulating cryptocurrencies for quite some time. In 2019, passed a law allowing banks to hold and sell cryptocurrencies.
More and more companies and individuals in Germany are holding digital assets such as cryptocurrencies as the time is evolving. Around 4.9 million residents currently own cryptocurrencies. Individuals with an income of €300,000 or more per year hold about two-thirds of all cryptocurrencies. In the coming years, the number of individuals holding cryptocurrencies is expected to increase as Germany continues to become a more crypto-friendly and regulated country.
The future of cryptocurrency in Germany looks promising owing to the increasing adoption and potential regulatory changes that could further boost the industry.
Undoubtedly, Germany is trying to provide a regulatory framework that creates a supportive environment for the cryptocurrency market while protecting consumers.
Germany’s Crypto Regulations
National Scenario
- Germany identifies crypto as financial instruments, making them subject to laws related to securities, commodities and investments.
- It has regulated crypto assets by enacting a law in 2020 that mandates all cryptocurrency exchanges operating in Germany to obtain a license from the Federal Financial Supervisory Authority (BaFin)
- BaFin plays a vital role in the German crypto scenario!
European Regulations on Germany
- The European Parliament passed the Markets in Crypto Assets (MiCA) framework in April 2023.
- It aims to foster stability, and bring about security for the investors.
anti-Money Laundering Regulations (AML) Regulations
- Germany has a clear list of AML regulations applicable on exchanges and service providers.
- The providers must implement KYC procedures and monitor transactions to prevent money laundering.
- They are mandated to report suspicious activities to the Financial Intelligence Unit (FIU) via BaFin’s Suspicious Transaction Reporting system.
All exchanges in Germany are bound to have a license by BaFin and comply with AML and KYC regulations.
Taxation On Crypto in Germany
- Profits from cryptocurrencies are taxed at the personal income tax rate. The taxation is applicable to anyone involved in investing, mining, or trading cryptocurrencies.
- Crypto gains are tax free in Germany if they are less than 600 Euros or the holding period is more than one year.
- Income from crypto is also taxed. It is tax free if it is below the exemption limit of 256 Euros.
Here is a breakdown of tax rates as per income:
Taxation On Crypto In Europe
- In October 2023, the European Union adopted a new crypto tax rule that mandated crypto firms to share customer holdings between tax authorities.
- The directive’s scope includes stablecoins, NFTs, e-money tokens and crypto-assets in a decentralized manner.
- A mandatory automatic exchange of information shall be there between tax authorities and crypto-asset service providers.
- It will be published in the Official Journal, the EU’s gazette of legal acts.
- UK HMRC treats crypto as an asset, that means any gain made from its sale is exposed to capital gains taxes. From April 2023, the annual gains allowance fell from 12,300 Euros to 6,000 Euros.
- There are different taxation rules in different countries of Europe:
- Spanish crypto taxes
- Crypto is taxed as a capital asset here.
- Tax rates depend on the type of transaction and what is sold or exchanged.
- Tax is based on the national income tax rate in Spain.
- Staking rewards are treated as investments, taxed at 19% or professional income with a tax rate of 24%.
- From 2023 onwards, Spanish residents shall report any crypto assets over 50,000 Euros in another country via Model 721.
- If combined assets including crypto are over 700,00 Euros, a resident is exposed to wealth tax.
- Non-residents pay a general income tax of 24% and 19% capital gains tax on asset transfers and interest earnings.
- Spain offers residents to offset a limited 25% of capital losses against the tax liability, non-residents are excluded from the list.
- Belarus
- In 2018, the Eastern European state legalized crypto and exempted all individuals and businesses from crypto tax until 2023.
- It has just been extended until January,2025.
- All crypto activities here are considered personal investments which makes them free from both, Income tax and Capital Gains tax.
- Portugal
- From 2018 till January 2023, all proceeds from selling crypto were tax free in Portugal.
- From 2023, gains from selling crypto held for less than a year are subject to a flat tax rate of 28%. Long-term gains from selling crypto remain tax-free.
- Crypto-crypto trades are also tax free.
- NFTs aren’t considered to be crypto assets for tax purposes.
- Malta
- Popularly known as Blockchain Island, Malta is a crypto tax haven.
- It recognizes Bitcoin and other cryptocurrencies as a ‘unit of account, medium of exchange or a store of value’.
- It means one pays no Capital Gains Tax on long-term gains from selling crypto provided it is considered ‘a store of value’.
- Crypto trades are viewed as similar to day trading stocks or shares. As such, they attract the Business Income Tax rate of 35%.
- There are however structuring options within the Maltese tax system that allow people to reduce this tax rate to between 0% to 5% – it all depends on how much one earns and his residency.
- Switzerland
- Income tax is levied on crypto mining as well as if one is a qualified day trader.
- Wealth tax is levied on total net worth each year. It depends on where you live.
- Individual, non-professional investors, are exempted from Capital Gains Tax.
Europe is quite ahead in terms of crypto in comparison to other places! The countries here have made to the list of top 10 crypto friendly nations due to crypto-friendly laws and taxation policies.
Trading In Europe
- The finalisation of MiCAR in 2023 marked Europe’s position as the global vanguard in the detailed crypto regulation arena.
- The regulation aims at standardising crypto assets functioning across the European Union.
- It promises legal clarity for issuers, service providers, and end-users.
- It also builds up additional security and market integrity.
- Europe is seen as one of the top crypto adopters in 2023! Switzerland and Malta are recognised as hotbeds of crypto startups.
- Due to a more unified approach by Europe for crypto assets regulation, it is gaining popularity!
All about MiCA
MiCA regulation 2023/1114 issued on 31 May 2023 on markets in Crypto-assets (the Markets in Crypto-assets Regulation or MiCA) was initiated with a motive of creating a dedicated and harmonised comprehensive framework for markets in Crypto-assets in order to provide specific rules for Crypto-assets and related services.
Its agenda is to support innovation and fair competition, while ensuring a high level of security of retail holders and the integrity of markets in Crypto-assets . Adopted under the form of a European Regulation, MiCA will be directly applicable in all EU Member States from 2024.
The European Union’s revised Transfer of Funds Regulation (TFR)
The regulation addresses money laundering and terrorist financing! Following the FATF Travel Rule, the TFR is curated to combat these serious issues while mandating the detailed exchanges of sender and receiver data during crypto transactions.
- It is all set to come into action in December 2024.
- The most notable revision included the changed stance on domestic transfers and the timing of the exchange of the Travel Rule data.
- It requires crypto operators to identify their customers to avoid money laundering.
- Data about the source of the digital asset and its recipient, like name, account numbers, date of birth and address, must travel with the transaction and be stored on both sides of the transfer.
- The law will also cover transactions above €1000 from self-hosted wallets when they interact with hosted wallets managed by crypto-assets service providers.
- However, The rules do not apply to peer-to-peer transfers conducted without a provider or among providers acting on their own behalf.
Trading in European Union is not that tricky if we understand the basics of the laws operating in the region.
The Timeline: Regulations In Europe
As we go step-by-step, we unfold the developments which took place in the European Union’s stance on cryptocurrency since its inception!
- 2013:
European Banking Authority issued a public warning about the possible risks of virtual currencies, or crypto, thus creating a confusion in the region.
- 2014:
The EBA issued a decision on virtual currencies, which included a list of more than 70 risks associated with its dissemination for users, non-user participants and existing payment systems.
EBA did not recommend a comprehensive approach addressing all risks. However, it offered an immediate measure to handle the crypto situation.
- The 2016 awakening:
European Central Bank issued an analysis of virtual currency schemes, addressing the potential advantages of virtual currencies. A paper issued in 2016 analysed the application of DLTs in securities post trading. It urged the EU to start preparing regulations to monitor crypto market activities for future.
- The ESMA move in 2017:
The European Securities and Markets Authority (ESMA) published study in 2017 on the use of distributed ledger technology (DLT) in securities market.
ESMA released two statements on initial coin offerings (ICOs), one on investor risks and the other on the laws that apply to companies that participate in these offers. It emphasized that the existing regulatory framework could apply to blockchain, it also mentioned that some requirements could become less relevant and changes might be required for the future.
After that, the European Commission directed the EBA and ESMA to evaluate the applicability and appropriateness of the existing EU financial services regulatory framework to crypto assets!
2017 also saw the ICO boom! The European Commission acknowledged the existence of crypto assets.
- The 2018 reports:
The European Parliament released two reports about virtual currencies and central banks’ monetary policy.
The Financial Stability Board (FSB) released a study on the crypto asset market and its potential pathways for future financial stability concerns.
- G7 in 2019:
During the G7 meeting of July 2019 risks posed by global stablecoin projects were discussed.
FINMA, the Swiss financial authority, published a supplement to its ICO guidelines outlining how it treats so-called ‘stable coins’ under Swiss supervisory law.
In 2019, ECB highlighted the paper series with a discussion about stability in crypto-assets for future use.
The IMF interfered in late 2019 and identified selected elements of regulation and supervision to assist policy makers in framing the regulatory report on crypto assets.
- 2020 Onwards:
In September 2020, The European Commission adopted a new Digital Finance Package, including Digital Finance and Retail Payments Strategies, and legislative proposals on crypto-assets and digital resilience
ECB released a report about stablecoins’ regulatory status.
The European Commission proposed a pilot regime for market infrastructures that wish to try to trade and settle transactions in financial instruments in crypto-asset form.
In January 2020, the EU’s Fifth Anti-Money Laundering Directive came into effect, bringing cryptocurrency-fiat currency exchanges under the EU’s anti-money laundering legislation. This fifth directive requires exchanges to perform KYC and CDD on customers and fulfill standard reporting requirements.
- 2021 digitalisation:
In July 2021, The European Central Bank launched a pilot project for the “digital euro”. Also, it officially launched a 2-year-long study on the creation of a Digital Euro and the various nuances that would involve.
In July 2021, the European Commission released a statement on travel rules to crypto transactions to make them more traceable.
In September 2021, European Securities and Markets Authority published a report on Trends, Risks and Vulnerabilities where crypto assets were identified as a high-risked innovative financial technology.
- The most recent development:
On April 20, 2023, the EU Parliament passed the Markets in Crypto Act (MiCA), a unified legal framework to regulate crypto-assets in the European Union, in order to mitigate money laundering and help reduce consumer risk by making providers liable for losses. It will be implemented in 2024!
Final Thoughts
Cryptocurrencies are broadly considered legal across the European Union. It depends from country-to-country how the tax is levied on crypto assets. However, the EU is counted among one of the most crypto friendly regions of the world. With a unified regulatory framework in place, we can only expect a more transparent and solid functioning in the EU in terms of digital assets.
