This is an article I published in the technology edition of The Paper in April.
Continue to track global encryption regulatory policies for everyone and contribute better content.
My Twitter: @curiousjoe5
In the current crypto regulation, an important issue is regulatory clarity. The biggest problem with crypto regulation is not too strict regulation, but the lack of laws. Whether in Asia, America or Europe, there is a lack of a comprehensive and unified regulatory legal framework. Europe is moving faster in this regard.
The debate on the EU Crypto-Asset Market Regulation will be held on April 18, and the final vote will be held on April 19. The significance of this is that if the bill is passed, European countries will have the first comprehensive crypto regulatory framework that governs the entire region. Under a clear regulatory framework, crypto companies have the opportunity to transform from gray industries to compliant companies, which may have a siphon effect on related resources.
On April 6, the Web3.0 project team of Japan's ruling party released the Web3.0 white paper, declaring that "Japan is back." On the same day, the U.S. Treasury Department released the world's first "Decentralized Finance (DeFi) Illegal Financial Risk Assessment", with detailed supervision in the field of decentralized finance, and the level of supervision was upgraded from the U.S. Securities and Exchange Commission to the Treasury Department.
Looking at the global crypto regulatory field, crypto has gained more and more government attention, but different governments attach different importance to different directions. US regulation is tightening rapidly. Whether it is the "de-banking" of crypto companies or intensive lawsuits and fines, the determination of US regulators to crack down on crypto is very clear. Asia has become more friendly to the crypto industry. In addition to the recent white paper in Japan, the crypto regulatory environment in the Middle East, especially Dubai, has been relatively loose. Singapore has a tendency to tighten after the collapse of Terra and FTX, but overall it is still more suitable for the survival of crypto companies. Southeast Asia has a high acceptance of crypto. The average age of the Vietnamese population is relatively low, and the proportion of the population using cryptocurrencies is very high. The Philippines has had the experience of "making gold" by the whole people during the GameFi (gamified finance) boom. It is worth mentioning that Hong Kong has recently been embracing crypto with a clear attitude. On April 9, the Financial Secretary of the Hong Kong Special Administrative Region Government, Paul Chan, published an essay on the website of the Hong Kong Special Administrative Region Government, saying, "Recently... some people in the society are skeptical about the prospects of Web3.0. However, we believe that this is the best time to promote the development of Web3.0. In the next stage, market participants need to further develop blockchain technology... and bring leapfrog progress to the real economy."
The encryption industry is characterized by high talent mobility. Many practitioners do not need a fixed "workstation", and a large proportion are "digital nomads". Under the distinct regulatory differences, resources will tend to flow from a vicious regulatory environment to a benign regulatory environment. If the trend is further strengthened, there may be a phenomenon of talent and capital "flowing eastward". When the "Hong Kong concept" was hot last month, many Americans were busy learning Chinese and collecting Chinese market information, showing signs of "eastward" development.
In the current crypto regulation, an important issue is regulatory clarity. The biggest problem with crypto regulation is not that it is too strict, but that there is a lack of laws. Whether in Asia, America or Europe, there is a lack of a comprehensive and unified regulatory legal framework. Europe is moving faster in this regard. The debate on the EU's Markets in Crypto-Assets Regulation (MiCA) will be held on April 18, and the final vote will be held on April 19. Its significance is that if the bill is passed, European countries will have the first comprehensive crypto regulatory framework that governs the entire region. Under a clear regulatory framework, crypto companies have the opportunity to transform from gray industries to compliant companies, which may have a siphon effect on related resources. For example, Circle, the issuer of the second largest stablecoin USDC, recently announced the establishment of a new European headquarters in France. The recent Silicon Valley Bank incident caused USDC to decouple from the US dollar by 13% at one point, and coupled with the increasingly stringent supervision of the United States, Circle finally took the first step to migrate outside the United States. What is indicative is that Circle is a compliant company registered and operated in full accordance with US law, and USDC was once regarded as the safest stablecoin asset. Such companies have chosen Europe, which shows that regulatory differences are affecting the layout of the crypto industry.
Against this backdrop, Europe’s CryptoAsset Market Regulation is a key point worth paying attention to in the near future.
Objectives and features of the Crypto-Asset Market Regulation
As a regulation issued by the European Parliament, the Crypto Asset Market Regulation will replace other existing crypto regulations in Europe. Through this regulation, the EU can achieve the following goals:
First, achieve unified regulation across Europe. Currently, crypto regulations in European countries cannot be unified, which confuses companies doing business across borders. The law aims to bring all practitioners under a unified framework, such as making German crypto exchanges follow the same rules as French exchanges. Second, curb money laundering in Europe. Although European countries have their own anti-money laundering laws, they are not sufficient in terms of cryptocurrency regulation and need to be supplemented. Third, protect the euro. Dollar-backed stablecoins and their growing popularity are threatening the euro. The law can control cryptocurrencies in several ways. First, it will increase the transparency of cryptocurrencies and ensure that the government has a grasp of the number, transactions and use of private cryptocurrencies. Second, it will strengthen the governance of cryptocurrencies and clarify the decision-making rules and procedures for the operation of European crypto projects, such as regulations for managing user information and KYC. Third, it will strengthen the custody of cryptocurrencies and clarify the procedures for storing and protecting crypto assets.
The Crypto-Asset Markets Regulation classifies crypto-assets into three clear categories.
The first category is utility tokens, which mainly refer to crypto tokens that can generate value in specific aspects. For example, tokens that can be used for voting or participating in governance in a specific ecosystem. The second category is asset-backed tokens (ARTs), which refer to tokens that have underlying assets (such as commodities, real estate or other cryptocurrencies) as value support, such as decentralized stablecoins such as DAI. The third category is currency tokens, which refer to centralized stablecoins such as USDT, BUSD and USDC. It should be noted that the third category does not apply to stablecoins issued by national digital currencies (CBDCs), the International Monetary Fund (IMF) or European banks.
These three categories are also the basis for different regulatory approaches in the regulations. For example, the law stipulates that before listing on an exchange, any utility token team must provide a white paper to the EU regulatory authorities; utility token projects must be launched within one year after the white paper is released. This regulation is aimed at projects that only issue tokens but do not launch products. These projects only raise funds but do not create actual value, resulting in investors being unable to obtain a return on their investment. For asset-backed tokens, the law stipulates that three disclaimers should be provided in the project's white paper, stating that: tokens may not always be transferable, the value of tokens may return to zero, and tokens may lose liquidity. That is, the risks that may be faced should be explained to customers in the white paper.
The Crypto Asset Market Regulations have the following characteristics:
First, the regulations may affect the trading and issuance of stablecoins. The law sets the upper limit of stablecoin payment transactions at 200 million euros per day. This is a relatively small amount relative to the daily usage of stablecoins. Taking USDC and USDT as examples, the global trading volume of these two major stablecoins is about 1 billion to 4 billion euros per day, of which the trading volume in the EU exceeds 500 million euros. If the 200 million euro limit stipulated by the EU is followed, the number of stablecoin payment transactions will be greatly reduced. However, this restriction has a scope of application. The 200 million euro limit only applies to payments and does not affect transactions and decentralized finance (DeFi), so the mortgage and lending platforms in the industry are not affected by this regulation.
Second, the law mainly regulates stablecoins, decentralized financial products and non-fungible tokens (NFTs), and has fewer regulations on assets such as Bitcoin and Ethereum. Due to the high inflation and instability of European fiat currencies, US dollar stablecoins are widely circulated in Europe as an alternative, which has aroused the vigilance of the European Central Bank. Therefore, the main purpose of this law is to protect the euro and limit the impact of digital assets such as US dollar stablecoins on the circulation of the euro.
Third, the regulation of non-fungible tokens. The EU executive hopes that non-fungible tokens can be exempted from regulation, but legislators in the European Parliament believe that many non-fungible tokens on the market are traded like financial products, and there may be fraud. Therefore, the bill regulates the types of transactions of some non-fungible tokens. For example, the fragmentation of non-fungible tokens must be registered with the government in advance and the project white paper must be submitted. Fragmentation trading of non-fungible tokens refers to splitting a non-fungible token into multiple parts for trading. For example, a digital artwork worth 10 Ethereums is divided into 10 parts, each of which can be priced at 1 Ethereum for trading, which can lower the threshold for transaction participation.
Fourth, the law is more friendly to decentralized finance and has fewer regulatory regulations. However, this also increases the space for governments to regulate on their own, which may keep decentralized finance in a gray area.
Fifth, the law explicitly requires European crypto asset platforms to obtain EU bank accounts and insurance before operating. This may be a relatively large threshold for many crypto companies.
The impact of the Crypto-Asset Market Regulation on the European crypto industry
If the regulations are passed this month, European crypto companies will have more than a dozen months to prepare before the new law is officially implemented. Relatively speaking, the new law is different from the previous regulatory policies of major European countries in terms of requirements and is more stringent in some areas, so European companies still have a lot of work to do on the road to embracing compliance.
For example, in France, currently only companies that provide crypto asset custody services (i.e. storing user funds in their own accounts) are required to obtain a mandatory license. For companies that do not provide custody services, operating licenses are not a must. The new law requires all crypto companies to obtain licenses. In this way, companies that did not apply for licenses before can no longer be free from supervision and must be brought under supervision in accordance with compliance paths.
In addition, the law will require crypto service providers to be insured before starting operations, which will be a big challenge for many French companies. After the collapse of FTX, the reputation of the crypto industry has been greatly affected, and most insurance companies dare not cooperate with crypto companies. And like American banks, French banks are not friendly to the crypto industry, because it is almost impossible for French crypto companies to obtain endorsements from well-known auditing companies.
Like France, affected by the FTX incident, German crypto companies were also ignored by local banks. But one good thing about Germany compared to France is that it is the big banks in Germany, such as Deutsche Bank, that are indifferent to crypto. Many small banks are more friendly to crypto, and German companies can get banking services from these small banks.
In addition to causing difficulties, the "Crypto Asset Market Regulation" will provide benefits in some aspects. For example, for German companies, the process of applying for a crypto asset custody license was previously cumbersome and highly uncertain. After the implementation of this law, the procedures for German companies to apply for relevant procedures will become simpler and more transparent.
In general, the law will have a positive impact on the European crypto market, after all, regulators will provide crypto companies with a clear compliance path. Crypto media Coindesk interviewed John Ehlers, COO of the Luxembourg-based crypto exchange Bitstamp, who believes that the transparency provided by the Crypto Asset Market Regulation will reassure banks that have a negative view of cryptocurrencies. This is very important for the crypto industry. "The Crypto Asset Market Regulation license is a real license, a prudent license. They will pay attention to how you run your business. This is very in-depth... Maybe you and the credit institution are in a different position, but at least they are sitting with you."
Cryptocurrency is born out of the utopian ideal of anti-establishment, and its development is accompanied by a strong decentralized temperament. These attributes have made the supervision of the crypto industry unsupportive, so crypto has been in a relatively gray area for more than a decade. With the advancement of encryption technology and the efforts of more and more practitioners, encryption is striving to enrich the actual use scenarios and pursue compliance. Before, we have been pursuing certainty, and this certainty seems to be gradually taking shape. As the attitudes of the United States, Asia, Europe and other places gradually become clear, supervision has provided new development variables for the original laissez-faire crypto industry. Crypto entities will have clearer regulatory basis as a reference when choosing a subordinate location. The crypto industry may therefore be re-arranged. One thing is certain, with the introduction of the European legal framework, European crypto companies should have more stable development in the foreseeable future.
(Author Curiousjoe is a cross-border researcher of international politics and cryptocurrency.)
