KEY POINTS

  • EU is planning to impose tighter rules on cryptocurrencies
  • One of the aims of the proposal is to reduce market fragmentation
  • The proposal would become a law once the EU governments and the parliament approve it

The European Commission is planning to regulate cryptocurrencies to mitigate "any potential risks" for investors.

The executive arm of the EU, on Thursday, proposed a regulatory framework for cryptocurrencies and stabelcoins. The proposed regulations, for the first time, will give legal certainty to cryptocurrencies and to those issuing cryptocurrency assets. The other aim is to reduce market fragmentation, Valdis Dombrovskis, executive vice-president of the European Commission, told CNBC. He said it is important because most of the digital finance providers in the bloc operate or offer services only in one country.

Under the proposed regulations, when a cryptocurrency company is authorized by one of the 27 countries in the EU, it will get permission to provide services in all the countries or member states.

The new rules also intend to impose tougher rules on stablecoins – cryptocurrencies that are pegged to other assets like fiat currencies. For example, the stablecoin Tether (USDT) is always pegged to the U.S. dollar. Stablecoins exist to avoid the volatility found in cryptocurrencies. But there are concerns as to whether the stablecoins are backed by the required reserves. It may be noted that Tether, the company that issues USDT stablecoins, has admitted they are not 100% backed by actual dollars.

The new rules, once implemented, would have major implications on Libra, the cryptocurrency project from the Facebook-led Libra Foundation, the CNBC report said. Initially, Facebook said Libra would be backed by reserves of multiple fiat currencies. But it later said specific libra stablecoins will be pegged to specific currencies depending on the jurisdiction.

As to when the regulation will take effect, Dombrovskis said it would take more than one year because the legislative process could take time. He admitted that it would depend on how it is prioritized by member states and the European Parliament. The proposal would only become a law once the EU governments and the parliament approve it.

Libra, the cryptocurrency and digital payments system launched by Facebook, has raised security issues, but the Federl Reserve says its FedNow system will have all the safeguards Libra, the cryptocurrency and digital payments system launched by Facebook, has raised security issues, but the Federl Reserve says its FedNow system will have all the safeguards Photo: AFP / Fabrice COFFRINI