Can regulation help to fight crypto-related financial crime?

Especially the centralisation of regulatory supervision and the requirement to provide more transparent information will help creating more oversight on activities and thus better protect customers against illicit activities.

Crypto asset markets

The emergence of crypto assets has changed the financial system in profound ways over the past years. This asset class has quickly reached global acceptability due to the perceived opportunities for profit generation, speed of transaction, worldwide acceptability, and the lack of intermediaries. Even if crypto asset markets represent less than one per cent of the volume of the global financial system, their growth has been immense since 2009 and as at 30.06.2024, the crypto market was similar in size to the securitised sub-prime mortgage market that triggered the global financial crisis during 2007 and 2008.

Threat

Apart from being an asset class that can potentially generate high returns, crypto currencies have the potential to trigger financial innovation and efficiency gains and thereby revolutionizing the traditional financial system. This ability to execute transactions rapidly and anonymously across borders may at the same time also pose a threat to withdraw funds outside the regulated financial system and foster illicit activities.

Harmonised EU regulation

Given the formerly fragmented legal framework in the EU member countries and the year-long considerations to regulate one of the most volatile asset classes, there has been an increasing need for a harmonised EU regulation which finally resulted in the coming into effect of the Regulation on Markets in Crypto Assets (MiCA) in June 2023. The regulation is meant to create transparency, uniformity, and security on crypto markets throughout the EU by replacing individual member states’ regulations and setting clear rules for crypto asset issuers and thus prevent illicit activities.

Analysis

The research provides an analysis of MiCA’s effectiveness and its potential to shape the future of the crypto market. By examining the regulation’s impact on legal certainty, market integrity, financial stability, the prevention of illicit activities, and innovation, this study aims to contribute to the ongoing discourse on the regulation of digital assets and their role in the global financial system.

Overcome many hurdles

This research shows that although regulators were hesitant for long to regulate a fast-changing asset class based on new technologies, the resulting framework was nevertheless created successfully. The regulatory process had to overcome many hurdles which were mainly related to keeping up with a technology and products that change quickly. The objective of this research was to find out what effects the changed regulatory landscape in the EU has on the crypto currency market and the market participants, especially focusing on the risks resulting from illicit activities and on fields that remain unregulated.

Comprehensive framework

Wider EU initiatives relating to the entirety of digital products, are crucial to support MiCAs objective of establishing a comprehensive framework for crypto assets. Recommendations for further strengthening the crypto asset market include establishing guidelines for decentralised finance platforms and specialised crypto asset services, further regulating the prudential treatment of crypto currencies, and promoting global regulatory cooperation.

Cornelia Aul

Cornelia Aul (Paderborn (Germany), 1973) is Head of Compliance in an international bank. She holds an MBA in Finance and Investment, a Master in Law and a Diploma in Business Administration. On 17 April 2025, she will defend her dissertation titled ‘The evolving regulation for crypto currencies in the EU and its effects on combating financial crime’ at the Faculty of Law of the Open Universiteit in Heerlen.

Promotors are Prof. mr. J.G.J. Rinkes (Open Universiteit) and Prof. mr. M.L. Hendrikse, (Open Universiteit). The copromoter is Dr. M.D.H. Nelemans (Radboud Universiteit). The defense can be attended live at the Open University in Heerlen and followed online via ou.nl/live.