By Francesco Guarascio and Peter Maushagen
BRUSSELS (Reuters) - The European Union should adopt common rules on cryptocurrencies and scrutinize how new digital units are distributed to investors and subsequently traded, according to a report prepared for EU finance ministers.
In the report, the Brussels-based think tank Bruegel argues for EU-level regulation of crypto exchanges and clearer rules on "Initial Coin Offerings" (ICOs) to control risks and exploit the potential of the industry and its underlying Blockchain technology.
The document, seen by Reuters, is due to be presented to the ministers who are meeting on Friday and Saturday in Vienna.
So far EU authorities have avoided comprehensive regulation because of the sector's relatively small size and the low percentage of trade in bitcoin, the most popular cryptocurrency, into euros. However, they have long worried about the market's high volatility and the risk of fraud and money laundering.
The market capitalization of crypto assets, such as cryptocurrencies and crypto tokens issued for an ICO, has fallen to around $200 billion in August from a peak of more than $800 billion in January. Bitcoin has dropped by about 60 percent against the dollar this year.
Now the possible expansion of the crypto exchange business in Europe and considerable interest in ICOs in EU countries, which account for 30 percent of the global market in terms of projects funded, is pushing regulators to take a closer look.
Hong Kong-based Binance, one of the world's largest crypto exchanges, plans to move to Malta, the EU's smallest state, after a Chinese crackdown on the industry.
Austria, which holds the rotating EU presidency, is asking whether EU regulations need changing to address "potential risks posed by crypto assets" and harness their full potential, according to a preparatory document for the meeting of finance ministers.
Bruegel says regulation of bitcoins as such is impossible because of their virtual nature, but that of entities dealing with the instruments, such as exchanges, could be subject to stricter disclosure rules or even be banned. "As done in China, mining farms can be forbidden," the document said, referring to the business of releasing new cryptocurrencies.
REGULATORY ARBITRAGE?
New EU rules on money laundering will increase checks on crypto exchanges but are unlikely to be fully operational in all member states before 2020. Regulation of the platform business is largely left to national authorities.
Citing the planned Binance move to Malta, Bruegel said this "might suggest that there is scope for regulatory arbitrage" following a crackdown on exchanges in some Asian countries.
However, the report also said exchanges seeking jurisdictions with lighter regulation might need to be tolerated for some time "to experiment and learn about the best approaches to this fast-developing technology".
Clearer rules on ICOs could also be useful as most involve utility tokens, where future services are promised in exchange for a current payment - a business that is currently often unregulated. Only the smaller share of ICOs that are securities usually fall under EU financial regulations.