Lots of light, a little shadow
The EU, in a globally unprecedented step, has adopted extensive regulation of crypto-assets. Alfred Taudes, WU crypto expert and long-standing lecturer at the WU Executive Academy, explains the repercussions of the new MiCA Regulation for the day-to-day business of investors and enterprises.
The EU has embarked on an untrodden path in terms of crypto-assets: A short while ago, the European Parliament adopted the Markets in Crypto-Assets Regulation (MiCA in short), creating the first legal framework for Bitcoin, Ethereum, etc. in the history of cryptocurrencies. The regulation obliges anyone who issues crypto-assets to submit detailed information (for example in the form of white papers) to their customers and zeroes in on insider trading and market abuse. What’s more, providers can in the future be held liable for severe losses and other cases defined by the regulation.
“The new regulation does not come as a surprise. The EU has been working on it for two years. Basically, MiCA now extends the minimum rules that other stock exchanges have had in place for many years also to crypto-assets,” Alfred Taudes, founder of WU’s Research Institute for Cryptoeconomics and a seasoned lecturer at the WU Executive Academy, explains. Crypto-assets have, at least in parts, been regulated also before that, for example by the guidelines on money-laundering.
Taudes considers two specific ramifications of the regulation to be very beneficial: First, a permit issued in one EU country will from now on be valid in the entire Union. “Second, this will result in a competition between national regulatory authorities, which will create fertile soil for start-ups.”
Also, the regulation will bring about legal certainty as service providers will require a license and be obligated to fulfil requirements with regard to operation, organization, and management that resemble those of traditional banks. “The intention is to ensure that investors’ money doesn’t just evaporate if an exchange uses it to speculate, to name just one example,” Taudes breaks it down. The rules for stablecoins, which promise a fixed exchange rate vis-à-vis official currencies or other assets, are especially strict: only established financial services providers will be allowed to sell them.
In Taudes’ assessment, the EU regulation leaves some room for interpretation when it comes to NFTs. The acronym is short for “non-fungible token” and describes a type of cryptocurrency that represents unique digital assets such as artworks, music, videos, games, and other collectors’ items. Contrary to conventional cryptocurrencies such as Bitcoin or Ethereum that are fungible because they attribute the same value to all coins, NFTs are unique and cannot simply be exchanged.
“The regulation does not apply to individual NFTs. That being said, the fractional parts of such a unique NFT will not be considered unique or non-fungible.” This is especially relevant for the issuance of “large series” or “collections” of NFTs that share the same qualities. The area of decentralized finance (DeFi), aiming to shift traditional financial services such as loans, asset management, and asset trading to decentralized, blockchain-based platforms, will also be exempted from the regulation. However, this will only be the case if the respective service is decentralized.
“In actual business practice, NFTs are often issued in series, and DeFi protocols frequently contain centralized functions. We will have to wait and see how the regulatory authorities and judges will decide on these matters in specific cases,” Alfred Taudes remarks.
In any case, the EU regulation has created a whole lot of potential for innovation, as traditional banks can now add crypto-assets to their portfolios. Taudes expects this to happen and believes that banks might work together with start-ups in this.
Using the platforms developed by fintechs, banks will be able to offer their securities customers Bitcoin and other assets. The market will also become more interesting for large investment funds as there will finally be legal certainty.
The crypto market is a textbook case of a new market, where things are crazy at the beginning, until it reaches a certain level of maturity and requires regulation. Now, there’s a risk of too much authority intervention, Taudes cautions: “Regulation is not a silver bullet.” He explains that a regulation will fulfill its intended purpose if regulatory authorities implement it in a prudent way and crypto and traditional finance industries adopt the new rules and develop respective services accordingly. So-called tokenized assets, for instance, come with a whole host of possibilities to work the financial market, for example by splitting assets such as shares and real estate into smaller units. This might attract new groups of customers.
In general, Taudes considers the EU to be on a good path. In contrast, he observes “utter chaos” in the realm of regulation in the US: “This could definitely give Europe a competitive edge.” Regulation, however, cannot perform miracles. Europe’s Achilles’ heel continues to be its lack of venture capital. Among the 25 largest venture capitalists in the area of the blockchain, not a single one hails from Europe.
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