Building a European market for crypto-assets: Who’s afraid of Libra?
The European Commission has just proposed a new regime for regulating cryptoassets in the EU. The new ‘Digital Finance Package’ includes a number of interesting features. Its centrepiece is the proposed Regulation on Markets in Crypto-assets (MiCA), accompanied among other things by a pilot regime for DLT market infrastructures. If adopted, these instruments will revolutionise the market place for crypto-assets in Europe and beyond. However, as I argue below, the proposed regime essentially is a response to Facebook’s Libra project and thereby partly driven by political fear. A more ambitious, self-confident approach would have embraced more innovative tools on the regulatory and supervisory side towards a more dynamic and adaptive framework for crypto-assets.
The proposed MiCA Regulation aims to establish a comprehensive regulation of crypto-assets, including stablecoins, and crypto-asset service providers. Its key objectives are to foster legal certainty for trading activities in such assets, as the legal position is relatively unclear at present. Further, MiCA aims at promoting innovation and development in EU markets while also ensuring consumer protection and financial stability.
The Commission is to be commended to tackle this field of burgeoning activity and to provide a reliable legal framework for it. This in itself is likely to boost the EU crypto-assets sector and will involve other benefits such as mitigating the risk of fraud, money laundering and other illicit activities. The proposed regime is likely to facilitate better access to payment services and new investment opportunities for consumers and businesses. Crucially, also, the EU hopes to benefit from the so-called ‘first mover advantage’ in potentially influencing any future global standard (similar to its success with the GDPR in data protection law). This push comes at a timely moment and is very promising, given that the United States’ approach to the matter is still very fragmented and inconsistent as well as highly political, whereas Asian jurisdictions show a rather restrictive approach towards crypto markets.
Among the highlights of the new regime is the established ‘passporting’ principle, which means that providers of crypto-assets who are authorised in one EU Member State are automatically able to trade with the entire Union without any further scrutiny. In fact, the MiCA regime transposes key principles known from traditional EU capital markets and financial services regulation (in particular, MiFID) to the new markets of today. The passporting concept is a success story, but it is also built on the idea of trust and mutual recognition between EU Member States. Further attractive features of the regime are likely to be an authorisation requirement for crypto-assets, the requirement to have a legal presence in the EU, an obligation to publish a ‘White Paper’ for the benefit of investors (which would correspond to an IPO prospectus), as well as ongoing information duties, compliance requirements and market supervision. An upgraded role for the EU market watchdogs EBA and ESMA and the application of the Market Abuse regime (MAR) will likely add to the credibility of the new crypto-assets market.
However, there is the risk that the ambitious regime may suffer from political skirmishes that are boiling both locally and internationally. The first controversy arises between the EU and the national levels. It appears that the European Commission is pushing for an innovation-friendly space and seeks to promote business opportunities in new markets, whereas many Member States (including France, Germany, and Italy), pursue a more restrictive approach and emphasise the risks for consumers. If these two conflicting goals could be seen as ending up in a good balance, it is unfortunate to witness that a broader fear has gripped regulators on a global scale since big tech firms have pronounced plans to move into the market. In particular Facebook’s announcement to adopt its own stablecoin Libra may thereby tip the balance in favour of the latter, more restrictive direction.
Stablecoins are cryptocurrencies that are designed to minimise the volatility of their market price, typically by backing the coin to a ‘stable’ asset or basket of assets. Libra tokens will be backed by a basket of currencies and US Treasuries to avoid the volatility that has characterised earlier cryptocurrencies such as Bitcoin or Ether. As such, stablecoins should pose less of a consumer protection problem as they are expected to be much safer than first-generation cryptocurrencies—the ‘stable’ aspect would tackle the volatility problem and reduce the chance of fraud and gambling. Stablecoins have many other advantages and will generally reduce transaction costs. The problem is that regulating stablecoins is such a heavily politicised topic that the EU is moving into the opposite direction, and the proposed MiCA regime will put additional burdens on that market segment rather than privilege it. In the taxonomy of the new regime, stablecoins will qualify as either ‘asset-referenced tokens’ or ‘electronic money token’ and are subject to a range of requirements which become even more restrictive where a token is viewed as ‘significant’, ie where a high range and use is expected—which clearly has Libra in mind. Reading between the lines, the proposal shows the fear of losing monetary sovereignty to private actors, and it is no coincidence that a few days after the Commission’s proposal was published, the ECB launched its initiative for a digital Euro.
Fear is never a good counsellor and a poor basis for decision-making. MiCA may thus end up being overly restrictive, in particular given the additional changes to be expected during the legislative process. This could drive firms out of the market rather than attracting them. Although new research has not found strong evidence on capital flight in light of tougher regulation, the announcement of the recent AML5 Directive caused some crypto firms to close their operations in Europe, citing higher costs of compliance.
MiCA uses a number of problematic features, in particular extremely broad definitions for the categories of assets it will apply to. Whereas the official reasoning behind this is to make them ‘future proof’ and broad enough to capture any future technological innovation, the downside of this approach is that the regime is somewhat backwards-looking and may petrify market behaviour to the status and knowledge that we have today. This may lead to high costs for innovative projects in the EU, in particular for startups, and may ultimately stifle innovation and backfire on the sector. Another problem is that the proposed package does not address the ‘technology gap’ on the regulatory side. Market supervisors in the EU are still deplorably underequipped with staff, and especially with technology, computational resources and corresponding expertise. In a nutshell, what MiCA does is to regulate a highly dynamic and technology-driven market without addressing speed and technological capabilities at the supervisory end of the equation.
All of this leads me to conclude that the MiCA regime misses out on a great opportunity: rather than being driven by fear and rather than recycling established principles from financial services regulation, a really innovative approach to regulating crypto-assets should have been more self-confident and experimental. A framework based on the idea of a regulatory sandbox or on experimentation spaces would have given both regulator and regulatee the opportunity to learn from each other and develop a more dynamic, flexible regulatory regime that can be adjusted in the future when needed. The DLT pilot regime is a good step into that direction.
Being the ‘first mover’ is a good idea, but you need to get it right—else you risk cementing the status quo for decades to come. Instead of being driven by fear, a more dynamic regime could have embraced the challenge and global competition for new technology in finance in a constructive and ambitious way.
Wolf-Georg Ringe is a Professor of Law & Finance and the Director of the Institute of Law & Economics at the University of Hamburg, Faculty of Law, and a Visiting Professor at the University of Oxford.
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