The State of Crypto in the EU — A Special Report on Regulation, CBDCs and Crypto Taxes

The EU and cryptocurrencies. Relationship status: it’s complicated.

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Even though Europe's share of global crypto transaction volume in 2021 was the highest of any region, the ECB has repeatedly advocated for a digital euro and reprimanded crypto for being wasteful and an enabler of illicit activities. In this special report, CoinMarketCap Academy looks at:

The crypto-friendliest countries in Europe
The latest EU regulation of cryptocurrencies
The ECB's stance on a digital euro
How the ECB's monetary policy impacts crypto prices

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Which European Nations Are the Most Crypto-Friendly?

First, assuming you are likely invested in cryptocurrencies or a true-blue crypto-native — you would probably think that countries like Dubai or Singapore, with their favorable crypto tax regime, would rank top. Surprisingly, a recent report ranked Germany (tied with the U.S.) as the most crypto-friendly country in the world!

In terms of crypto taxes, European countries are not as anti-crypto as their officials make it sound. Let’s take a look at some of the top European nations with crypto-friendly tax regimes.

Germany 🇩🇪

Germany took the spot as the most crypto-friendly nation — beating out Singapore — in a report by crypto exchange aggregator Coincub. Partly attributing to its rise is the fact that Germans do not have to pay any taxes on crypto profits under 600 euros. If you hold crypto for over a year, you are not liable to taxes either, regardless of whether the cryptocurrency was earned through trading or staking. Crypto mining is a taxable event, but you can make deductions for equipment and resources.

Portugal 🇵🇹

Portugal famously has no tax on crypto at all. That has made the country somewhat of a crypto tax haven for individuals and led to the rise of a sizable crypto scene. However, Portugal announced it would eventually tax crypto as well, although the implementation of this idea is probably still some time away.

Slovenia 🇸🇮

Slovenia is one of several countries (Hungary being another one) that attempts to grab a share of the crypto market by offering an easy flat-rate tax. Gains are taxed at a flat 10%, with a generous €15,000 tax threshold. Mining is seen as personal income and taxed accordingly.

Other notable mentions are Switzerland, Hungary and Malta, all of which have either low capital gains taxes or dedicated low-tax legislation specifically for crypto.

Cryptocurrency Regulation in the EU

The EU passed two key pieces of regulation in 2022:

1. Transfer of Funds Regulation (ToFR)

2. Markets in Crypto-Assets (MiCA)

Both were passed to "facilitate the competitiveness and innovation of the financial sector in the European Union, to establish Europe as a global standard setter and to provide consumer protection for digital finance and modern payments."

Let's look at each in more detail.

Transfer of Funds Regulation (ToFR)

ToFR imposes compliance standards on crypto assets to crack down on money laundering risks in the sector. It passes several intricate measures, simplified below:

All crypto asset transfers will have to be linked to a real identity, regardless of value.
Service providers involving crypto assets (i.e. exchanges) will have to collect information about the issuer and the beneficiary of the transfers they execute
All companies providing crypto-related services in any EU member state will become obliged entities under the existing AML directive.
Non-custodial wallets will be required to collect and store information about their customers' transfers.
Enhanced compliance measures apply when dealing with non-EU entities.

And a couple of other minor and less interesting measures. ToFR was the directive that caused outrage and mockery among crypto proponents for requiring non-custodial wallets to collect and store customer information.

This, of course, is virtually impossible to enforce and sort of defeats the purpose of a non-custodial wallet.

Markets in Crypto-Assets (MiCA)

MiCA is the big one and the key legislative proposal regulating the crypto sector in Europe. It was passed in the European Parliament by all 27 member states and implements the following measures:

The European Securities and Market Authority (ESMA, the European equivalent of the SEC) and the European Bank Authority can prohibit or restrict the sale or marketing of crypto assets by Virtual Asset Service Providers (i.e. exchanges).
The ESMA will develop a methodology and sustainability indicators to measure the impact of crypto assets on the climate.
The ESMA will supervise exchanges regulated in non-EU countries.
Exchanges will be subject to AML regulation and will have liability for damages or losses caused to their customers due to hacks or operational failures that they should have avoided.
Exchanges will have to segregate clients' assets and isolate them.
Exchanges will have to warn investors about the risk of volatility and losses.
Stablecoins will have to maintain reserves to cover all claims and the reserves will have to be fully protected.

Due to a passage proposing the ban of proof-of-work as a consensus mechanism in the EU, MiCA generated a lot of publicity in the summer of 2022. The passage was eventually removed, although the directive still emphasizes the environmental impact of cryptocurrencies.

Bureaucrats applauded the directive, with MoP Dr.Stefan Berger calling it "balanced and open to technology." He maintained the directive would "set a global standard."

Industry representatives were less buoyed by the new regulation, calling it burdensome but not existentially threatening. The biggest challenge will be the harmonization of rules across all EU jurisdictions, a process that is expected to take some two and a half years (at least).

The ECB's Stance on a Digital Euro and CBDCs

If there's one thing you need to know about the ECB and cryptocurrencies, then it's the following: they praise central bank digital currencies and scorn regular cryptocurrencies.

Look no further than senior ECB officials talking about a potential digital euro:

To put some real oomph behind its arguments, the ECB also published not one, not two, not three, but four different research papers and reports that argue in favor of CBDCs and against cryptocurrencies:

A deep dive into crypto financial risks: stablecoins, DeFi and climate transition risk concludes:

Stablecoins could have contagion effects on the real economy through their exposure to government and private debt. This would depend on the liquidity of the underlying collateral but is at least not completely wrong.
DeFi needs regulation (probably true, but painting with a broad brush here).
Stablecoins are impractical as a means of payment, which has already been proven false.

Towards the holy grail of cross-border payments looks at different solutions for cross-border payments:

Bitcoin is (unsurprisingly) considered too wasteful and dismissed for having no KYC.
Fintech solutions and correspondent banking, which are currently the most popular options, are solid but deemed inefficient.
Stablecoins are dismissed for eating away at monetary sovereignty.
CBDCs (unsurprisingly) are lauded as the best and most efficient option, despite some privacy concerns that still need to be addressed.

The economics of central bank digital currency argues that:

CBDCs are good for retaining monetary policy control and prevent the exit to a foreign currency, as is the case with stablecoins.
CBDCs also give policymakers a more direct and immediate transmission mechanism for policies, such as reducing friction in fiscal payments.
CBDCs allow for more effective implementation of monetary policy through interest rate hikes. While the paper paints this in a positive light, it's questionable whether concentrating so much power at the central bank is something desirable.
CBDCs are commended for being an effective "remuneration tool" (others would call it financial control). Overall, the working paper recommends investigating a CBDC further to not give up control of the payments market to private (non-European) companies.

Finally, Mining the environment — is climate risk priced into crypto-assets? looks at the carbon footprint and energy impact of cryptocurrencies and urges investors to pay attention to ESG standards. Cryptocurrencies are not dismissed out of hand, and proof-of-stake coins are likened to electric vehicles (with PoW coins being the dirty combustion engine).

The report calls upon public authorities to "evaluate whether the outsized carbon footprint of certain crypto-assets undermines the achievement of their green transition commitments," a thinly-veiled threat to not let miners set up shop.

All in all, the picture is clear: CBDCs are great and should come sooner rather than later in the form of a digital euro. PoS is kinda ok, especially if there's KYC attached. PoW is a big no-no and should be shunned at any cost.

ECB Monetary Policy and Crypto Prices

We have talked about the importance of monetary policy on crypto prices repeatedly, such as in this article about Bitcoin and inflation. However, that was subject to U.S. monetary policy, but do ECB policy decisions have a significant impact on crypto prices?

The answer is: not really.

Despite the significant transaction volume in the EU, ECB rate hikes do not have the same impact (some would say do not cause the same terror) on cryptocurrencies as the ones by the Federal Reserve.

For instance, the ECB's first rate hike this summer led to a bounce in the euro, but crypto prices did not budge. Similarly, another 75 bps hike in August 2022 did not meaningfully impact the markets. Interestingly, the same is true for decisions by the Bank of England.

Charlie Morris, founder and chief investment officer of ByteTree Asset Management, said:

"While all macro decisions matter, the Fed is the most important as it drives the global policy."

However, considering monetary policies among advanced economies are rarely diametrically opposite to each other (Japan being a notable exception), it's probably not surprising that the Federal Reserve is seen as the one setting the tone for the rest.

Conclusion

The EU is often portrayed as bloated with bureaucracy and averse to innovation, and not undeservedly so. The European crypto industry is fighting an uphill battle against its only bureaucrats and competing jurisdictions like the UK and Australia, which both aim for much more crypto-friendly regulation.

That being said, crypto tax regimes in Europe are surprisingly vanilla in many countries, so it literally pays to hold on to your coins.

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