EU Crypto Security Debate Reignited as US SEC Continues Industry Crackdown

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A controversial study released last week by the European Parliament appears to overturn the rationale for the European Union’s (EU) historic new crypto laws.

The study, by a panel of academics, denied that crypto should benefit from special, lighter rules, saying it should be treated by default under a harsher regime designed for stocks and shares. traditional bonds.

Regulators must act quickly to rein in the kind of bad behavior that has come to light recently, its authors say, and they worry about much-heralded blocks Regulation of crypto asset markets, MiCA, has so many loopholes it will deliver little benefit , and could create a regulatory vacuum.

Although commissioned by the European Parliament’s Economic and Monetary Affairs Committee, the study has no official status within EU policy-making and, some say, would force lawmakers to roll back new legislation before even until the ink is dry.

Disputes over which side of the line a crypto asset is on can be painful, as companies such as Ripple, Coinbase and now Binance have discovered. Treating crypto as security is even more painful: financial laws often dictate that regulated products can only be traded on particular, registered exchanges; the crypto is supposed to be used to buy things directly, through the blockchain.

Hence the justification for an adapted diet. For Francesco Paolo Patti, an associate professor at Bocconi University in Italy, last week’s study is flawed and treats securities law enforcement as a black-and-white issue while MiCA expressly creates a spectrum.

EU lawmakers decided to do something different, create a special set of rules for crypto rather than inserting it into existing regulatory frameworks, Patti told CoinDesk. The existence of MiCA makes it clear that crypto is special.

Classifying crypto as traditional financial instruments could hamper MiCA’s goal of having a single license to trade across the entire bloc, as different parts of the EU such as Italy and Germany have a different view of this. which is a security, he said. Moreover, it wouldn’t even stop the kinds of bad events seen recently in the crypto markets, he added, noting that FTX had a license in Cyprus to operate under the existing rules of the crypto financial market. EU, known as MiFID.

Dirk Zetzsche, professor of financial law at the University of Luxembourg, who is one of the authors of the study, dismisses these arguments, saying that traditional financial rules are needed as a safety net.

Zetzsche worries, based on what he says are private conversations with dozens of regulators, that there could, in practice, be free-for-all regulation under MiCA. Even the biggest agencies would struggle to enforce the rules against the roughly 10,000 crypto assets, and smaller jurisdictions simply won’t bother probing or verifying the information, he told CoinDesk.

Gathering the facts is costly for each case, Zetzsche said in an email, adding that national authorities will not invest those resources unless they have a good record in their jurisdiction, so it is a question of a de facto waiver by way of non-performance.

While the report cites a wild west of decentralized finance and highlights recent meltdowns such as FTX and Three Arrows Capital, Zetzsche says its goal is to enable honest and serious innovators to excel.

It’s about weeding out the criminals and the ignorant, and letting the pros in, he said.

Under MiCA, crypto issuers get a lighter touch unlike traditional financial instruments like stocks, they won’t need prior approval from regulators to issue a whitepaper for investors. This third way, between treating crypto like securities or leaving it entirely unregulated, has certainly won praise from the industry.

Dedicated rules are the only way to regulate crypto, Christian Steiner, head of regulatory affairs at Bitpanda, told CoinDesk, because the dual status of currency and investment means existing rules don’t work. Crypto has a different technical setup than traditional finance, which also requires a lot of differentiation within the regulatory setup.

It’s hard to imagine EU lawmakers will entirely pirouette on legislation that is now, after years of drafting, signed into the statute book. But Zetzsche isn’t alone in worrying about how MiCA might play out in practice.

Gerry Cross, director of financial regulation, policy and risk at the Central Bank of Ireland, said in a May 30 speech that he was particularly concerned about the coordination and consistency of the implementation of the MiCA in the 27 national jurisdictions of the EU. One regulator could veto a crypto model that another accepts, allowing companies to effectively choose their favorite, he argued.

We believe there is a real risk of sub-optimal results if this does not get the attention it deserves now, Cross said, calling on the EU banking authority to put in place a new mechanism to coordinate cryptographic applications.

Although the text is nailed down, there are indeed still a lot of issues that MiCA raises. But, says Patti, it shouldn’t be the innovative startups hoping to launch a new business idea that pay the price.

If you ask first [for regulatory approval] and you face an authority that is not able to fix the problem, you have the same problem, said Patti. It is therefore better to help the competent national authorities with clear standards, instead of pretending that everything is security by default.

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