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In the cryptocurrency field, autumn is often an active period for regulators. As with previous trends, 2020 is no exception. Both the European and American crypto markets are in a state of high tension: While the market is still following the news of the US Commodity Futures Trading Commission’s crackdown on the derivatives trading platform BitMEX, the UK Financial Conduct Authority has taken measures to prohibit retail investors from using cryptocurrency derivatives. .
The intensive news cycle has to some extent concealed the impact of another regulatory event that broke out a week ago, and a large number of reports will also have a major and lasting impact on the global financial system: the European Union has drafted regulations on the crypto asset market.
The EU’s far-reaching regulatory framework aims to provide regulatory transparency for digital financial companies serving residents of the European Economic Area, and it will be particularly important for the two interrelated fields of stablecoins and decentralized financial applications, almost throughout 2020 , These two areas dominate the encryption industry. what is the reason?
Stable coins pose a threat to stability
At present, the draft proposed by the European Commission in the form of a proposal is called the “Encrypted Asset Market Regulation” (MiCA). Before becoming a law, this proposal must go through quite a long legislative process, which means it may take months or even years for this new rule to take effect.
The proposal shows that stablecoins (also referred to in the proposal as “asset reference tokens” and “electronic currency tokens”) have always been a topic of greatest concern to European legislators: MiCA selects this asset class and develops a regulatory framework for it.
According to this proposal, stablecoin issuers will have to form a legal entity company in one of the EU member states. Other provisions of the proposal include provisions on capital, investor rights, asset custody, information disclosure and governance arrangements.
Albert Isola, the Minister of Digital and Financial Services of Gibraltar, explained to Cointelegraph that the European Commission is highly concerned about stablecoins because the authorities are concerned about the financial stability of the Eurozone:
It is generally believed that stablecoins, as a digital payment method, may bring huge benefits, providing greater financial inclusion and a more effective way of transferring funds. They are also seen as potential risks to financial stability and integration, and may weaken the effectiveness of monetary policy. The European Union may not welcome the electronic issuance of euros by entities other than the European Central Bank, which seems logical.
Isola mentioned that some “disruptors”, such as the future stable currency Libra, have great potential to decentralize currency control.
Seamus Donoghue, vice president of sales and business development at Metaco, a digital financial infrastructure provider, pointed out that the amazing growth of the stablecoin market in recent months is a prerequisite for the attention of regulators. He called it a “positive response”:
In 2020, the market value of the stable currency USDC alone has increased by 250%, from US$520 million to US$186 million, and has achieved significant growth in the past two months. Banking regulators have undoubtedly observed that although the asset class of USDC is still relatively small in the traditional payment field, it may have a huge impact on regulated banks and payment institutions.
At the beginning of September, Konstantin Richter, CEO and founder of Blockdaemon, a blockchain infrastructure company, said: “The finance ministers of Germany, France, Italy, Spain and the Netherlands issued a joint statement that outlines the legal and regulatory aspects of the EU. Before the challenge, stablecoins should stop functioning.” This illustrates the deep concern of the EU’s senior leaders in maintaining the sovereignty of the Union’s currency.
Richter added that there are some more concerned people involved in European financial policy formulation, such as the German Finance Minister Olaf Scholz, who advocates the introduction of a regulatory framework.
Most experts interviewed by Cointelegraph mentioned that inspired by the Facebook-backed stablecoin Libra, the European Commission considered the dangers and opportunities of launching asset-referenced tokens.
The explanation at the beginning of the MiCA proposal stated that the crypto asset market is “still small” and cannot pose a serious threat to financial stability; however, the drafters of the regulatory framework acknowledged that “with the emergence of global stablecoins, the situation may change. Stablecoins seek wider adoption by combining the functions of stabilizing their value and using the network effects generated by companies promoting these assets.” So far, one stablecoin project has begun to do so: Libra.
Mattia Rattaggi, the chairman of the board of directors of FICAS AG, a Swiss crypto investment management company, believes that stablecoins are the application of blockchain technology, which has the greatest potential for significant impact. Regulators have fully realized this:
More than a year ago, with the launch of the Libra project by Facebook, stablecoins have attracted the attention of regulators and have since been closely monitored by the global public and regulators. Regulators realize that stablecoins are bound to improve the efficiency of payment systems (especially international payment systems) and promote financial inclusion.
In order to further prevent the possible destruction of currency stability in the Eurozone, the MiCA proposal sets out even stricter compliance requirements for issuers of tokens that are considered “important” asset references. These importance criteria include the size of the customer base, market value, transaction volume, and even the “importance of the issuer’s cross-border activities and interconnection with the financial system.”
Bad news for DeFi?
Stablecoins have largely promoted another huge area of encrypted financial activities: various applications and protocols based on decentralized finance. Given the stringency of the proposed token requirements surrounding asset references, if a large amount of liquidity locked in a certain decentralized protocol is denominated in stablecoins that do not meet the MiCA standard, it is obvious how complicated things will become.
Another major source of uncertainty is that MiCA requires all Crypto Asset Service Providers (CASPs) seeking to authorize operations in the EU to become legal entities with offices in one of the EU member states. Whether or not European authorities treat individual DeFi applications as CASP is still an open (and central) issue. In this case, the development team that maintains the DeFi protocol may have to come up with workarounds to “decentralize” The concept extends to incredible breadth.
In response to the proposed regulations, members of the International Trusted Blockchain Applications Association expressed concern that MiCA may effectively prohibit European residents from entering the DeFi market.
Martin Worner, chief operating officer and vice president of blockchain tool provider Confio, believes that compliance issues can be solved by implementing on-chain governance mechanisms that target specific jurisdictional regulatory frameworks:
Compliance issues can be resolved within a self-management framework under which organizations can develop compliance DeFi tools that work in their jurisdictions. Just as there are rules for companies in different jurisdictions and how to transfer across borders, the same rules apply to blockchain.
Elsa Madrolle, the international general manager of the blockchain insurance company CoolBitX, told Cointelegraph that the DeFi landscape may change as MiCA becomes law, much like the ICO landscape changed rapidly after the initial boom. At that point, “it’s obvious what a DeFi project needs when doing business in the EU or seeking EU customers.”
Madrolle believes that by then, DeFi projects will fall into one of the two categories of “regulated and unregulated”, and the biggest question will be whether the rest of the world will be consistent with the European regulatory framework.
XReg Consulting is a regulatory and policy company that recently released a breakdown of the proposed regulatory framework. Its partner Nathan Catania hopes that regulators can coordinate between MiCA’s requirements and non-regulation of DeFi. Catania said:
In my opinion, projects that are completely decentralized and do not provide professional services to third parties cannot be considered CASP, and there is still room for development of DeFi projects.
Today, many DeFi protocols are far from fully decentralized. How much decentralization is good enough is still a conscious debate, and it mainly exists inside the crypto bubble. Regulators seem to be about to participate in this debate, but this will have some very obvious effects on the encryption business.