BRUSSELS, 18 October 2021 — The MiCA framework proposed by the European Commission last year goes some way towards setting a global standard, but questions remain.
In a new 20-page Finance Watch publication titled “One born every minute: Striking the balance between promoting innovation and protecting citizens”, Christian M. Stiefmüller, Senior Research and Advocacy Advisor, analyses the proposed regulation on markets in crypto-assets, which especially covers “significant” tokens issued by third-country entities that are traded globally.
To ensure regulatory consistency and effective enforcement, Stiefmüller sees a strong case for continued constructive engagement between the European Union and other major jurisdictions in the relevant international fora. Those include the Financial Stability Board (FSB) and the Committee on Payments and Market Infrastructures (CPMI) at the Bank for International Settlements (BIS).
IMF report echoes Finance Watch calls for international crypto framework, standards
The Finance Watch paper comes as the International Monetary Fund released earlier this month its own research signaling that regulators should come up with global standards for cryptocurrency. Its latest Global Financial Stability Report identifies risks posed by the crypto universe and provides policy options to navigate these unchartered waters. While crypto assets offer an opportunity to make quick and cost-effective payments, enable innovative financial services and foster access to previously “unbanked” areas, challenges and risks remain, an IMF blog points out, including disclosure and oversight. The size of the decentralised finance, or “DeFi” market swelled from $15 billion at year-end 2020 to about $110 billion as of this month, the IMF noted.
Stiefmüller commented: “Distributed ledger technology (DLT) is full of potential. To harness this potential in a way that is safe and beneficial for its users we have to build upon robust regulation.”
Markets in Crypto-Assets Act (MiCA)
The Finance Watch paper notes that there are currently more than 12,500 crypto-assets in circulation, with a total estimated value of more than €2 trillion. Some 2,300 crypto-assets are reported to have failed already. On MiCA, the Finance Watch paper explores its scope and definitions, taking a deep dive into e-money tokens and asset-referenced tokens.
MiCA attempts to define new categories of assets that may pose risks to users and markets and therefore require stricter regulation.The proposed categorisation still faces issues such as the distinction between ‘stablecoins’, essentially a digital version of ‘e-money’, and other so-called ‘asset-referenced tokens’ and does not make sufficient use of existing, largely complementary financial sector legislation.
Stiefmüller adds: “MiCA lacks consistency in applying the principle of ‘same activity, same risk, same regulation’, which would call for many more of these assets to be covered by the existing financial services rulebook, such as the responsibilities of financial intermediaries towards retail investors under the Markets in Financial Instruments Directive (MiFID II).”
Other areas: DORA and DLT Pilot
In addition to the proposed regulation on markets in crypto-assets, or MiCA, the Finance Watch paper also looks at other elements of the EU Digital Finance package released last year. These include the proposed regulation on Digital Operational Resilience, or “DORA”, and another on Market Infrastructures based on Distributed Ledger Technology, or “DLT Pilot”.
Analysis of DORA includes a look at the scope of the proposed legislation, including coverage and relationship with other EU legislation. On substantive legislation, the paper looks at the proposed Information and Communications Technology (ICT) governance and risk management, noting that it should be reviewed not only against the relevant provisions in other sectoral legislation, such as the second Payment Services Directive (PSD2), the Markets in Financial Instruments Directive (MiFID II) and the European Market Infrastructure Regulation, or EMIR, but also against relevant horizontal legislation, in particular the Networks and Information Systems Directive (NIS 2). Stiefmüller posits that reviewing both sectoral and horizontal legislation prevents overlap, aligns with “best practice” and achieves a maximum of harmonisation across sectors and member states. The paper also addresses important adjustments in other key pieces of financial-sector legislation, such as the Capital Requirements Directive (CRD V) and the Bank Recovery and Resolution Directive (BRRD II) that will be required to give proper effect to DORA.
The paper also outlines the regulatory approach, eligible financial instruments, and aspects of direct access of DLT to retail investors as well as the role of DLT network nodes. It points out that the proposal of granting trading platforms direct access to retail investors deprives these investors of the protections they would enjoy under MiFID II when trading in traditional assets with the same level of risk. On the relationship with DORA, the paper notes that the obligations under DORA should be extended to operators of DLT network nodes under the DLT Pilot regulation.
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Notes to editors:
About MiCA: Unlike other major jurisdictions, the European Union has taken the initiative to regulate and supervise this emerging market. In its proposal for a Regulation for Markets in Crypto-assets (MiCA) , the Commission sets out three main goals: protecting investors and users, preserving financial stability, and preventing any dilution of central banks’ control of monetary policy.
Finance Watch welcomes the legislative proposal and supports Commission objectives. Throughout the proposal, the Commission emphasises that it intends to proceed cautiously so as to not hinder innovation in a still emerging field of technological and commercial development. Finance Watch agrees that regulation must be balanced carefully and should not stand in the way of genuine innovation. Financial innovation should, however, always be considered on the basis of the societal benefits it generates, not as an end in itself. This balance is clearly difficult to strike but successful regulation should ultimately favour the common good over vested commercial interests. In a number of instances, the proposal offers room for improvement in this respect.
About Finance Watch: Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.