When it comes to laying down the rules of the game, the European Union has been a standard setter. The General Data Protection Regulation (GDPR) and the recently negotiated Digital Markets Act (DMA) and proposed Digital Services Act (DSA) are examples of Europe leading the charge in consumer protection standards for a digitalizing economy. With respect to crypto, the Markets in Crypto Assets (MiCA) Regulation is another world-first. However, there are currents within EU institutions who have decided to take a hardline approach with a targeted focus around ‘un-hosted wallets’ and overbearing enforcement on crypto asset service providers (CASPs). This has the potential to stoke data honey pots, lead to millions in wasted compliance costs and disincentivize consumers from engaging over-the counter.
That is why we have contributed and signed onto ‘An Open Letter to EU representatives’ which was initiated by leading industry representatives in financial markets, decentralized finance, consumer advocacy and associations. The letter is a deep-dive into how and why Europe is straying from the path that will bring the most benefits in terms of market transparency, growth and consumer protection. It also provides a way forward with concrete proposals that elected representatives can take right now to re-direct the EU back on track as a region where crypto and blockchain will flourish and call home.
We implore our members and readers to make their voices heard and sign in support of the web3 community. Let us explain why.
The goal: a proportional, justiciable, and accommodating regulation
There is a growing chasm between the policy makers tasked with bringing a rules based order to the crypto ecosystem and the innovators and builders who are piloting that ecosystem into the mainstream. This dissonance is partly due to the fact that many regulators simply have not had a productive dialogue with members of the web3 community. Perhaps too, they are hesitant to accept a truly decentralized market economy. And yet progress is still being made to foment a common language of understanding between those who make the rules and those who write the code. Indeed, for web3 to live up to its promise, our community and the powers that be will need reciprocity.
Crypto may be a frontier technology but it still lacks harmonized definitions and standards, a robust and panoptic consumer protection umbrella and audit standards. With this in mind there are not many people left (even amongst hardline Bitcoin maximalists) who do not foresee a role for regulation in the future of the space. The question looming over everyone’s heads is to what extent this regulation will aim at being proportional, justiciable and accommodating to a hyper-growth industry?
When it comes to laying down the rules of the game, the European Union has been a standard setter. The General Data Protection Regulation (GDPR) is a world first in terms of data privacy and fidelity, and the recently negotiated Digital Markets Act (DMA) and proposed Digital Services Act (DSA) are more examples of Europe leading the charge in consumer protection standards for a digitalizing economy. With respect to crypto, the landmark Markets in Crypto Assets (MiCA) Regulation is another world-first. No jurisdiction in advanced economies or otherwise has attempted a more complete regulatory regime for the nascent crypto and digital asset space.
The risk of a hardline approach: millions in wasted compliance costs and disincentivized consumers
However, there are currents within EU institutions who have decided to take a hardline approach in bringing MiCA and the corresponding Transfer of Funds Regulation (TFR) to market.
The proliferation of public ledgers and the ethos of open-data has profound implications for the evolving nature of sovereignty in the digital age. The European Parliament’s ECON Council has recently ushered in amendments to both MiCA and the TFR which challenge this evolving dynamic. Proof-of-Work mining narrowly escaped the chopping block in another bout of voting mere weeks prior. It stands to reason that education and a clear understanding of this arguably complicated and slip-stream industry is weighing on the ability of lawmakers to grapple with its potential in the face of this knowledge barrier. That is why dialogue is needed now more than ever and we stand ready alongside other members of the web3 community to provide council and guidance.
In the context of MiCA and the TFR – targeted focus around ‘un-hosted wallets’ and overbearing enforcement on crypto asset service providers (CASPs) has the potential to stoke data honey pots, lead to millions in wasted compliance costs and disincentivize consumers from engaging over-the counter. This is best witnessed in the removal of the EUR 1000 di minimis threshold to small transactions and the application of the Financial Action Task Force (FATF’s) travel rule between a CASP and non-CASP as anything but a cash transaction.
The task: take an informed, big-picture view of crypto and blockchain
Decentralized finance, which facilitates a Lego-box assortment of financial products and services running on rails of code will be hit most heavily by these proposals. In DeFi some of the most promising applications for the web3 ecosystem are beginning to take shape and underneath this decentralized foundation a new dimension (Metaverse, Non Fungible Tokens, Distributed Autonomous Organizations) is growing. We strongly oppose the inclusion of a reflexive regulatory umbrella that is unable to take a ‘big-picture’ view of how crypto and blockchain can improve the socioeconomic fabric of our world. European regulators have been focusing on the negative with a hardline view of crypto as facilitating money laundering, terrorist financing and scams. The truth is that more money is laundered as a percentage of global GDP through traditional means than has been laundered through crypto.
We implore our democratically elected officials to consider how transparency and an open dialogue can bridge the gap between lawmakers and the private sector before rushed decisions clip the wings of a nascent industry before it can really take flight. Europe has an opportunity to be a standard setter for other jurisdictions and leverage the best of decentralized technology while responsibly mitigating the negative externalities like with any new techno-financial paradigm.
That is why we have signed onto ‘An Open Letter to EU representatives’ which was initiated by leading industry representatives in financial markets, decentralized finance, consumer advocacy and associations. The letter is a deep-dive into how and why Europe is straying from the path that will bring the most benefits in terms of market transparency, growth and consumer protection. It also provides a way forward with concrete proposals that elected representatives can take right now to re-direct the EU back on track as a region where crypto and blockchain will flourish and call home.
We implore our members and readers to make their voices heard and sign in support of the web3 community.
Erwin Voloder
Economist
EBA