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The good, the bad and the ugly of EU crypto regulation

U.S. regulators, such as Securities and Exchange Commission Chairman Gary Gensler, They say it with bad intentions Saying that “there has been clarity for years” when it comes to cryptocurrencies, the European Union took a concrete step by approving the regulatory framework in April 2023. Crypto Asset Markets (MiCA). While not perfect, this was an important step in the right direction for our industry and also a warning to the US that it might be left behind.

Just like Bitcoin (Bitcoin) revolutionize old technological, economic and financial concepts, regulators will need to review the existing regulatory framework to create an enabling environment for these new technologies.

Also read: France updates crypto licensing regime to sync with MiCA

On the other hand, there are many problems in the blockchain industry that the traditional regulatory framework cannot adequately address: this leads to dissatisfaction and waste of resources. lawyers discuss possible interpretations of wording rather than adhering to clearly defined legislation.

While Web3 use cases show great potential, it remains a “remix” of the traditional financial system but aims to increase efficiency, openness and fairness for all participants.

MiCA: A necessary but mediocre step towards regulation

Leaving aside the typically complex language of financial regulations, the situation is much simpler than it seems. In short, our laws are intended to prevent people from harming others. Some examples include terrorists sending or receiving money to organize terrorist acts, or scammers trying to steal money from investors. They also ensure that authorized individuals and organizations are held to a set of operational standards developed throughout the history of modern financial markets.

From a more technical perspective, the regulations that form the basis of these operational standards are:

  1. Anti-money laundering and terrorist financing regulations.
  2. Securities and commodity regulations.
  3. Regulation of market infrastructures.

Although the SEC insists that existing regulations generally cover these three points, Many elements are not covered by rules and sanctions dating back 100 years. We can largely attribute this problem to two issues.

The first is the classification of digital assets. Are they commodities or securities, or do they fall into a completely new category? Digital tokens often exhibit characteristics of one, both, or neither, creating a significant dilemma for existing mechanisms.

If the second the pace of innovation far exceeds the pace of adaptation to the slow and complex regulatory frameworks of traditional finance. Governments have a responsibility to create regulations that are robust enough to prevent wrongdoing and protect stakeholders, yet flexible enough to keep pace with changes in this evolving industry. How can these authorities compete with a smart contract with completely different logic and parameters that is published within minutes and updated on the same day?

For those of us already in this highly dynamic industry, the need for new standards and guidelines aligned with the features and challenges that Web3 presents is clear.

MiCA represents a promising initiative. But administering the framework will be difficult because individual EU Member States will test it in their national courts, generating a litany of cases with different outcomes. With that said, here’s the good, the bad, and the ugly of MiCA.

MiCA: good

The best part about MiCA? Stricter rules and harsher penalties for Crypto Asset Service Providers (CASPs) who lose customer funds! This is a persistent problem in the cryptocurrency industry; exchanges and wallets bear no liability if hacked or compromised, thus losing user funds; This led to users losing tens of billions of dollars from which it was impossible to recover. This is unacceptable and has helped irreparably destroy the lives of many people in our industry.

MiCA: ugly

Although the main aim is to prevent market manipulation, most of this takes place outside the EU (through offshore organisations); So it doesn’t seem very useful. But it can help indirectly, as it signals to the market which way regulators are moving; but this will also depend on the sanctions that will be imposed when the cases come before the judge.

Them excluding decentralized finance and future central bank digital currencies (CBDCs). While DeFi’s lack of inclusion is a positive, the vast majority of on-chain transactions and activity occur in the world of decentralized finance, and it’s frustrating that it’s been left out.

MiCA: villain

Unfortunately, there are many troubling elements in MiCA that readers should be aware of:

  • “Travel Rule” increased surveillance In an unprecedented way, it forces service providers to identify the recipient and sender for every transaction.
  • A. a very low threshold for reporting of €1,000 It leads to greater oversight of U.S. banks compared to the traditional $10,000 threshold. Considering that the vast majority of financial crimes are committed by banks and larger institutions through money laundering and other fraudulent activities, it is frustrating that ordinary people are subjected to an Orwellian level of scrutiny.
  • The token launch and liquidity offer will require official approval from lawmakers. This will greatly limit the number of legitimate projects launched within the EU, both directly and indirectly. It’s hard to imagine waits being short and the process being fast: Governments have proven time and again to be slow and inefficient, especially when it comes to new technologies.

There is another fundamental problem that exists in all kinds of regulations of the European Union and deserves to be repeated: The fragmented nature of the EU justice system makes it difficult to draw meaningful conclusions about the impact of individual sentences in the future. In short, this is a small victory for Web3 and will require a lot more work from regulators around the world.

This is in stark contrast to the US justice system, which has traditionally relied on a unified and solid foundation of legal decision, although not Web3. A series of fragmented decisions make it highly unlikely that other countries outside the EU will follow MiCA at full speed; Instead, they are more likely to wait for the United States to initiate its own substantive framework.

Regulators, exchange operators and promoters say they will proceed very carefully and slowly until the U.S. has its own regulatory guidelines. While they may be inspired by MiCA, the north star isn’t what they need.

The blockchain industry is at an inflection point for both regulators and users. Countless people have seen their savings go to waste due to scams and scams as regulators struggle to keep up with the industry’s rapid pace of innovation.

Mike Sarvodaya Sybil is the founder of Galactica Network, a Layer-1 protocol that leverages “zero-knowledge cryptography” to achieve resilience, privacy compliance, and instill strong reputation primitives into DeFi and DAOs. He graduated from Utrecht University with a master’s degree in financial econometrics. Before Galactica, he spent most of his career as a risk manager and analyst for global hedge funds focusing on trading currencies, stocks, commodities and digital assets.

Translation by Giorgio Libutti

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