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Alexander Prognimak, CFA of the CFA UK Future of Money Working Group, reviews the European Union’s plans for cryptoassets.
Gone are the days when London’s famous red buses ran advertisements promoting the dream of a bright post-Brexit future for the NHS.
As an ad (which caught the attention of the advertising regulator) said: If you see bitcoin on a bus, it’s time to buy.
Beyond individuals, the list of potential cryptocurrency buyers is growing rapidly – it now includes not only traditional risk seekers such as hedge funds, high net worth individuals (HNWs) and family offices, but even a few. companies listed on the S&P 500 (which have acquired positions in bitcoin). In short, the new world of the crypto-asset market is here.
Ironically, the technology behind the craze grew out of anti-establishment sentiment, but it has succeeded in converting even established financial world strongholds like central banks to explore the possibility of creating new digital complements to them. cash (central bank digital currencies).
To provide the curious investor with a lucid guide to crypto and blockchain: what they are, what they aren’t, and where they might go from here, please click here.
Timely and necessary regulation
This growing interest makes a proposal for the first supranational regulation for crypto assets Europes Markets in Crypto-Assets Regulation (MiCA) presented at the end of 2020 as part of the European Union (EU) digital finance package both timely and necessary. .
To complete the proposal, an EU regulation on a pilot scheme for market infrastructures based on distributed ledger technology (DLT Infrastructure Regulation) has been announced in a way, a pan-European sandbox which aims to create a safe regulatory space for incumbents and to allow the regulator to learn more about the realities of the DLT product market. Participants will be exempt from certain requirements introduced by MiCA.
Arguably this is a proposal created to meet the intentions of some companies to run their own ledger of payments with tokens referenced to fiat currencies, MiCA attempts to cover several different types of crypto assets and to cover them. classify precisely.
Explore the MiCA approach
MiCA Title I details its scope and definitions, including definitions of crypto assets, asset-referenced tokens, and electronic money tokens. Titles II to IV form the core of MiCA, the rules on issuers of cryptoassets. Title III deals specifically with stable coins (renamed ART – tokens referenced by assets).
Among other sections, Title V provides general authorization and operating requirements for certain crypto asset service providers, aka PSAPs; and Title VII specifies the supervisory powers of the competent national authorities (NCAs) for ART and EMT (electronic money token) issuers, the powers of the European Banking Authority (EBA) for the SARTs and the joint competence with the NCAs for important EMTs. The rest of MiCA deals with a legislative technique.
MiCA explaining some of the terms MiCA termDefinitionReal-World ExampleCrypto-asset A digital representation of value or rights that can be transferred and stored electronically, using distributed ledger technology or similar technology Bitcoin Utility token A crypto-asset that is intended to provide a digital access to an application, service, or resources available on a distributed ledger and are accepted only by the issuer of that token to grant access to those available applications, services, or resources. ARTs) A crypto-asset whose main purpose is to be used as a medium of exchange and which claims to maintain a stable value by referring to the value of several fiat currencies, one or more commodities, or one or more crypto-assets, or a combination of these assets DAIE-money tokens (EMT) A type of crypto-asset whose main purpose is to be used ized as a medium of exchange and which claims to maintain a stable value by being denominated in (units of) af iat currency.USDC Significant Asset-referenced tokens (SARTs) An ART that is designated significant by EBA either by request of the issue or via an EBADiem initiative (Libra) Significant E-money tokens (SEMTs) An EMT that is designated significant by EBA either by issuance request or via an EBAT initiative EtherCrypto-asset service provider (CASP) Custody service provider , trading, exchange, brokerage, promotion or advice related to crypto assets
Any company, regardless of its country of incorporation, that advertises or offers business to European customers should follow the proposed regulations.
Therefore, the main benefit of compliance is the EU-wide passport given to crypto-asset service providers (CASPs) allowing them to operate and market their business anywhere in the EU.
However, the price of such a passport is what can arguably be described as mini-MIFID requirements, which include among others: having an entity established in the EU and obtaining a license; meet current capital requirements; and comply with organizational requirements (employee qualifications, IT security, record keeping, anti-money laundering, etc.). Token issuers have additional requirements.
What does the future look like?
MiCA is an ambitious legislative project. Typically, it would take a few years for such a proposal to find its way into the EU’s decision-making apparatus.
It will be interesting to see if the discussions are able to address some of the weaknesses in the proposal that have been highlighted. This includes clarifying the scope, for example how specific instruments will fall under the MiCA or MIFID framework.
Another issue that the discussions would likely need to articulate and clarify is the responsibilities of crypto-asset custodians in the event of a transfer of ownership due to a technological issue: for example, if a database update is required. code results in a vulnerability that leads to an illegal transfer of ownership of the tokens to third parties who would be legally bound to indemnify customers.
The DLT pilot scheme that accompanies MiCA could lead to a (welcome) pan-European sandbox for innovative companies. However, industry groups have already pointed out that the proposed requirements are disproportionate or that these exemptions are unenforceable. It can be argued that established actors could benefit more from the proposed regime than future newcomers.
How will the UK (and the US) evolve?
In view of the UK’s exit from the EU, it will also be interesting to see how (if at all) the UK’s proposed regulatory approach to crypto comes close to the proposed framework.
According to a recent UK Treasury consultation, the UK government is still considering expanding the scope of the UK financial services regime to capture cryptoassets. Meanwhile, lobby group TheCityUK released a report on the subject in the UK context, Cryptoassets: Shaping UK regulation for innovation and global leadership, on May 25.
Across the pond, despite the active participation and discussions of several US regulators, there is still a lack of uniform definitions or much of a formal regulation at the federal level when it comes to crypto-assets. .
Sometimes what starts out as an advertisement on a bus can quickly lead to regulatory issues – and significant legislative time.
Originally posted on the CFA Society United KingdomProfessional Investor Blog.
By Alexander Prognimak, CFA.
All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: Getty Images / raybon009
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