Earlier this week the European Commission published its much anticipated legislative package for cryptoassets in the E.U. This includes the Regulation on Markets in Crypto Assets and a Pilot Regime for Market Infrastructures based on DLT.
As part of an impressive Digital Finance Strategy, this is a significant moment for the E.U. as it looks to paint the first stroke on what is a currently a blank canvas, globally.
The proposed regulations are a demonstration of the Commission’s intention to create regulatory clarity in a market that recently has been operating, for the most part, on best practices developed by the big players in the sector, or by a ‘best fit’ regulation based on related practices.
The package looks to address this in the form of a fully harmonised regime that will replace existing national frameworks and allow Crypto Asset Service Providers (CASPs) to provide their services across the Single Market.
This E.U. legislation is likely to be exported as a global standard to many other jurisdictions seeking to adopt crypto regulations and this adds to its sense of global importance.
“The regulation covers an extremely wide remit with new ‘catch all’ definitions looking to ensure that nothing slips through the net,” says Lavan Thasarathakumar head of regulatory affairs at Global Digital Finance.
The approach the Commission has taken promises to be innovation focussed while being risk based. Requirements that are applied to tokens will be based on the type of cryptoasset and the issuer. There is no new news in this policy which sees regulators seeking to put in place proportionate regulations on par with traditional financial services regulation for securities and other assets.
Sian Jones, senior partner at XReg Consulting comments, “On one hand, there are some heavily prescriptive and stringent rules that go well beyond much of what already exists in regulated traditional finance, and a lot is squarely targeted at the likes of Libra, while on the other hand Markets in Crypto Assets (MiCA) sets itself out as, somehow, a lighter form of regulation.”
Jones is the architects of Gibraltar’s Cryptoasset Framework and is a recognized global authority on crytpoasset regulations.
“There will be double licences for CASPs, in some specific cases, while traditional forms of institutions can undertake cryptoasset activities without needing authorisation as a CASP – Does the European Commission believe it is rolling out level playing field regulations?” questions Jones.
Once MiCA comes into force, it will be with us for a decade or more, a veritable bitcoin lifetime. Time will tell whether an E.U. wide regulation has the right balance of clarity, protection, and stability.
Given the interests of both industry players and policy sceptics it will be interesting to see how this develops. Of note from this package is that a number of technical aspects are subject to delegated acts leaving the power with the Commission to determine the finer points of the future of the industry.
The proposed Pilot Regime is a novel approach and one that will be welcomed by much of the cryptoasset sector and the financial services industry at large. The regime will allow market participants to operate in a safe environment where regulators will be able to assess the opportunities and the risks posed by the firms.
One of the difficulties at present is that existing financial services regulation was not designed with DLT in mind. The Pilot Regime will allow regulators to exempt aspects of the regulation that are considered too onerous for the development of this new technology.
Dea Markova, a senior director at FTI Consulting FCN Brussels points out, “For those of us who have spent a number of years now on developing industry, regulatory and digital sandboxes, it is exciting to see the Commission proposing, effectively, the first pan-European regulatory sandbox, with its Pilot Regime for Market Infrastructure based on DLT.
“Open only to trading facilities and security depositories, a good start, it is good to see that there is a clearer path to not only entry but to exit. The Pilot Regime participants can secure some exemptions for up to six years, and towards the end of that time, the Commission is to consider whether the Pilot Regime should go on, or, indeed, if parts of E.U. legislation needs changing for DLT to be truly adopted in capital markets.
“This is hugely innovative and is precisely what Hester Pearce’s ‘Safe Harbour’ proposal is seeking to achieve in the US.”
Markova knows what she is talking about. She led the FCA Industry Sandbox Consultation while at Innovate Finance and went on to the Monetary Authority of Singapore to run infrastructure projects supporting innovation, before joining FTI.
“We are at the very beginning of the legislative process and this proposal will now be amended by both the Council and the Parliament before inter-institutional negotiations begin and we get what will be the final regulation,” adds Thasarathakumar, “it is not a case of ‘watch this space’ for cryptoasset players, it is now time to actively engage with the Commission to ensure your voice is heard.”