Germany to Become Crypto Capital of Europe with New Cryptocurrency Regulations in 2024
The year 2023 brought significant changes to the cryptocurrency industry, particularly in Europe. Regulators worldwide intensified their efforts to establish formal laws for cryptocurrencies, prompted by the United States’ actions against major crypto players. This emphasized the importance of adhering to specific laws in each jurisdiction. Europe emerged as a key player in the crypto arena, implementing regulations aimed at ensuring safety and transparency in crypto trading. In this article, Coinpedia highlights some of the notable legislative developments in European cryptocurrency regulation.
Introduction
New regulations in the European Union have set a benchmark for other regions. After two years of negotiations, the European Council and Parliament agreed on the Markets in Crypto Assets (MiCA) proposal, which marks the first time digital asset businesses are regulated within the EU.
Cryptocurrencies are legal in the European Union, but regulations for crypto exchanges vary among member states. Similarly, crypto taxation differs across countries. The new regulations passed this year aim to enhance market credibility and create a more suitable environment for traders. For a comprehensive understanding of crypto regulations in the EU, this step-by-step guide is the ultimate resource.
Market Analysis in Europe
Central, Northern, and Western Europe (CNWE) is the world’s second-largest crypto economy in 2023. The EU Parliament passed the Markets in Crypto Assets Act (MiCA) in April 2023, focusing on crypto assets within the European Union. According to Chainalysis, Europe’s growth was primarily driven by “whales.” In 2023, Europe’s crypto economy reached $1 trillion, accounting for 25% of global crypto activity.
Crypto legalization and usage vary among European countries. In 2023, nearly 1,000 crypto entities registered in the EU. Germany stands out as the largest crypto market in Europe. Bitcoin is the preferred choice among Europeans, closely followed by Ethereum, NFTs, and Metaverse projects.
Country Crypto Scenario
Luxembourg issued the first BitLicense in October 2015. Norway classified Bitcoin as an asset, not a currency, in 2013, subjecting it to wealth tax on profits. Switzerland regulates Bitcoin businesses under anti-money laundering laws and classifies cryptocurrencies as an asset class rather than a security. The Swiss Financial Market Supervisory Authority (FINMA) governs all virtual currency regulation. In the United Kingdom, firms promoting crypto assets to retail consumers must be authorized or registered by the FCA or have their marketing approved by an authorized firm since October 8, 2023.
What is MiCA?
The implementation of MiCA, or Markets in Crypto Assets regulation, is a significant step for the EU in the world of cryptocurrencies. It provides a comprehensive framework to regulate activities and services related to crypto assets within the EU, replacing individual legislation from member states. This offers clarity and security to crypto asset service providers and token issuers. National regulatory agencies will enforce the law, while the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) will supervise and conduct investigations. The introduction of MiCA in 2024 will be a game-changer for cryptocurrency legislation, ensuring a safer and more regulated digital finance space. The regulation categorizes crypto assets into three sub-categories: e-money, asset-reference tokens, and all other crypto assets. It imposes strict rules on issuers of large stablecoins, including maintaining reserves to cover all claims and providing instant redemption rights to holders. Additionally, there will be transaction limits of €200 million ($208 million) per day if stablecoins are widely used for payments.
Germany at a Glance
Germany, as Europe’s largest economy, plays a significant role in the European crypto scenario. Cryptocurrency is legal in Germany, and it is gaining popularity among firms offering various services such as brokerage, trading, custody, staking, and CeFi-DeFi bridging. The German government has been working on regulating cryptocurrencies since 2019 when it passed a law allowing banks to hold and sell cryptocurrencies. Currently, around 4.9 million German residents own cryptocurrencies, with high-income individuals holding two-thirds of all digital assets. Germany’s crypto-friendly and regulated environment, coupled with increasing adoption, promises a promising future for cryptocurrencies in the country.
Germany’s Crypto Regulations
National Scenario
Germany considers crypto as financial instruments, subjecting them to laws related to securities, commodities, and investments. In 2020, Germany enacted a law mandating cryptocurrency exchanges operating in the country to obtain a license from the Federal Financial Supervisory Authority (BaFin). BaFin plays a vital role in Germany’s crypto scene.
European Regulations on Germany
The European Parliament passed the Markets in Crypto Assets (MiCA) framework in April 2023, aiming to foster stability and security for investors.
Anti-Money Laundering Regulations (AML)
Germany has established clear AML regulations applicable to exchanges and service providers. These providers must implement Know Your Customer (KYC) procedures and monitor transactions to prevent money laundering. They are also required to report suspicious activities to the Financial Intelligence Unit (FIU) through BaFin’s Suspicious Transaction Reporting system. All exchanges in Germany must be licensed 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, applicable to investors, miners, and traders. Crypto gains below €600 or held for more than one year are tax-free. Income from crypto is also subject to taxation, with amounts below the exemption limit of €256 being tax-free. The tax rates vary based on income.
Taxation on Crypto in Europe
In October 2023, the European Union adopted a new crypto tax rule that requires crypto firms to share customer holdings with tax authorities. The rule covers stablecoins, NFTs, e-money tokens, and decentralized crypto assets. It mandates a mandatory automatic exchange of information between tax authorities and crypto-asset service providers. The directive will be published in the EU’s Official Journal. The UK treats crypto as an asset, subjecting any gains from its sale to capital gains taxes. From April 2023, the annual gains allowance decreased from €12,300 to €6,000. Each European country has its own taxation rules for cryptocurrencies. In Spain, crypto is taxed as a capital asset, with rates depending on the type of transaction. Staking rewards are treated as investments. Belarus exempts individuals and businesses from crypto tax until January 2025. Portugal introduced a flat tax rate of 28% for gains from selling crypto held for less than a year. Malta, known as Blockchain Island, recognizes cryptocurrencies as a store of value and imposes no capital gains tax on long-term gains. Switzerland levies income tax on crypto mining and wealth tax on total net worth.
Trading in Europe
The implementation of MiCA in 2023 solidified Europe’s position as a global leader in crypto regulation. The regulation aims to standardize the functioning of crypto assets across the EU, providing legal clarity for issuers, service providers, and end-users. It also enhances security and market integrity. Europe has emerged as one of the top crypto adopters, with Switzerland and Malta serving as hotbeds for crypto startups. The unified approach to crypto asset regulation has contributed to Europe’s growing popularity in the crypto market.
MiCA Regulation
The MiCA regulation, issued in May 2023, aims to create a comprehensive framework for markets in crypto assets in the EU. It provides specific rules for crypto assets and related services, supporting innovation, fair competition, and the security of retail holders and market integrity. MiCA will be directly applicable in all EU member states from 2024.
The European Union’s Revised Transfer of Funds Regulation (TFR)
The TFR addresses money laundering and terrorist financing, requiring detailed exchange of sender and receiver data during crypto transactions. It will come into effect in December 2024. The revision includes changes to domestic transfers and the timing of Travel Rule data exchange. Crypto operators must identify their customers to prevent money laundering, and transaction data such as source and recipient details must accompany transfers. The law will cover transactions above €1,000 involving self-hosted wallets and hosted wallets managed by crypto asset service providers. Peer-to-peer transfers without a provider or among providers acting on their own behalf are exempt from these rules.
Timeline: Regulations in Europe
Since its inception, the European Union has undergone various changes in its stance on cryptocurrency regulations. In 2013, the European Banking Authority issued a public warning about the risks of virtual currencies. In 2014, the EBA outlined over 70 risks associated with virtual currencies. In 2016, the European Central Bank called for regulations to monitor crypto market activities. In 2017, the European Securities and Markets Authority published a report on the use of distributed ledger technology in securities markets. The European Commission directed the EBA and ESMA to evaluate the applicability of existing financial services regulations to crypto assets. In 2018, the European Parliament released reports on virtual currencies and central banks’ monetary policy. The Financial Stability Board studied the crypto asset market’s potential impact on financial stability. In 2019, the G7 discussed risks posed by global stablecoin projects. The European Commission proposed a pilot regime for trading financial instruments in crypto-asset form. In 2020, the EU’s Fifth Anti-Money Laundering Directive came into effect, bringing crypto-fiat currency exchanges under anti-money laundering legislation. The European Commission adopted a new Digital Finance Package and released a report on stablecoins’ regulatory status. In 2021, the European Central Bank initiated a pilot project for the “digital euro” and issued a statement on travel rules for crypto transactions. The European Securities and Markets Authority published a report on trends, risks, and vulnerabilities, highlighting the high-risk nature of crypto assets. The most recent development is the passage of the Markets in Crypto Act (MiCA) by the EU Parliament in April 2023, which will be implemented in 2024.
Final Thoughts
Cryptocurrencies are generally considered legal in the European Union, with tax regulations varying among member states. The EU is recognized as a crypto-friendly region, and the implementation of a unified regulatory framework will enhance transparency and stability in the European crypto market.