The EU Move to Regulate Crypto Sets Ground Rules for Future Policy
By: Jason Blick CEO of EQIBank, and Chairman of EQIFi
Certainty is always better than uncertainty, and the European crypto industry is in luck—the powers that be have reached a preliminary agreement on the crypto playbook. The Markets in Crypto-Assets (MiCA) proposal will be moving ahead, perhaps with more amendments down the line, with officials hopeful that it will make the “Wild West” of crypto a bit less wild. The document is not without its blind spots, though, with NFTs largely left out of its scope among other things. So what does it mean for the scene as is, and how should the regulators move forward from this foundation?
The sharp end of the stick
Overall, the demands for an average crypto project the document outlines are quite reasonable. Submit a proper whitepaper, be truthful about what you intend to do with the funds you raise, act professionally, and make efforts to protect the investors—all of this is quite fair. We have seen too many projects promise investors mountains to disappear with the money, and any regulatory safeguards against that are only good for the scene.
The need to disclose the project’s energy needs also makes sense, given the overall pivot towards more conscious investing. It is a direction the industry is moving toward on its own, embracing sustainable energy for mining and Proof-of-Stake consensus.
As far as the details go, though, there are those who got the sharp end of the stick: The fiat-pegged stablecoin industry found itself in the focus with this one, and will likely have to do some self-adjustment to comply. It is not surprising, given the amount of scrutiny such projects have already endured, especially in the light of the dramatic Terra collapse.
Besides the own fund's requirements, the limits on their investment options—only low-risk and high-liquidity assets, as stipulated by Article 35—do prevent them from a lot of the more lucrative lending options, such as corporate bonds or venture investing. This may force them into a margin that is just too tight to turn in a profit, unless they opt to raise transaction fees, which might not be too ideal given the cap on transaction volume. Redemption fees are not an option, under the rules set out in MiCA.
While rough and potentially disruptive, the rules on fiat-pegged stablecoins could end up opening new use cases and niches for the industry. In their current shape, they are mostly used by investors and traders as a way to lock in their capital on-chain without moving out of the blockchain space entirely. With the regulations in place, stablecoins could draw closer to full-fledged fiat off-ramps through redemptions and potentially even gain more traction as a payment method in various markets.
Closing the gaps
As ambitious, comprehensive, and, in many cases, forward-looking as MiCA may be, European officials are looking at more work ahead, such as regulating NFTs. As things stand now, over the following 18 months, the officials will be figuring out whether non-fungible tokens require a separate playbook.
A document they should draw inspiration from—and this goes not just for NFTs, but the overall strategy—is the EU Commission’s European Financial Stability and Integration Review 2022. Released in April, this document not only showcases the body’s respect-worthy grasp of the industry but also features a message that all regulators must take to heart: “even more emphasis would need to be put on activity-based regulation as opposed to entity-based one.”
This phrase comes to mind when you look at MiCA’s requirement for crypto-projects to apply for authorization to access, which would require setting up an office on EU soil. This could leave decentralized projects operating without a formal corporate structure excluded from the Single Market, giving an edge to more centralized entities.
The activity-based approach is ideal for regulating projects based on more complex business logic than your run-of-the-mill fiat-pegged stablecoin precisely because it ditches the narrow focus on a legal entity. This approach suits better for regulating a space that is known, if not notorious in some circles, for its ideological disdain toward centralization.
By focusing on activities and services various protocols accommodate, the EU would present a truly innovative and groundbreaking regulatory paradigm that will indeed set the standard for the world to follow. This would naturally position it as the hub for blockchain innovation, ramping up the associated business opportunities and ushering in a new, digitized and versatile economy.
The EU is moving on to introduce a comprehensive crypto rulebook that would apply across the entire Single Market, trying to leave ample room for innovation while also amping up investor protection. Such an endeavor is worthy of applause but even more worthy of those would be a genuine effort to set off a paradigm shift in the regulation itself. An innovative industry takes an innovative approach, and in embracing one, the EU has a milestone opportunity to not just boost its own blockchain sector, but to set the tone for global innovation.
About the author:
Jason Blick is the CEO of EQIBank, and Chairman of EQIFi. Jason qualified as a UK attorney and served as the nationwide manager of BerrmansLace Mawer, who specialize in financial services. He went on to manage legal and compliance in over 90 countries for Sun Microsystems, overseeing over €1.5 billion per year in transactions. He later became the CEO of Financial Partners Bank, with over 12,000 clients and $1.2 billion AUA.He is the founder of Cayman Enterprise City, the Cayman Commodities and Derivative Exchange, and he served on the board of the Cayman Islands Government Special Economic Zone Authority.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.