Last week, we launched our series on the upcoming EU legislation on crypto assets known as the Markets in Crypto Assets Regulation, or MiCA. In that article we discussed some of the key terms that would be useful for people getting familiar with MiCA for the first time. This week, we'll look at a different kind of foundation - who cares about this legislation, and why? In the process of this analysis, we will look at several different stakeholders: The European Union, the finance industry, and Dusk Network itself.
The European Union
Drafting, writing, passing, and enforcing legislation is a difficult and time-consuming process in any part of the world. But in a supranational union of 27 members, each with their own goals and motives, it is extremely tough. One can assume, therefore, that the passing of MiCA must be of great importance to the EU. Looking at the reasoning behind MiCA, we can see that it clearly is.
We must initially recall that the initial drafting of MiCA began in direct response to Facebook’s proposed launch of the now-abandoned Libra stablecoin project. Stablecoins, while still being a relatively small percentage of global token usage, are of huge concern to national and supranational governments for two large reasons. Firstly, if a stablecoin provider is allowed to take in real world assets in return for an issued stablecoin that is accepted in the real world, but then be allowed to use those assets for their own purposes, the issuer has in effect created two euros out of one. With enough usage, this has a potentially inflationary effect on currency, and it should therefore not be a surprise to see that MiCA includes several very strict clauses forcing stablecoin issuers to ringfence their assets and have them audited frequently in order to prevent this happening. Secondly, if people believe that holding their money in stablecoins is better than holding it in a high street bank, there is less capital available for banks to offer to business for loans or individuals for mortgages, encouraging them to take on riskier investments. Therefore, as we would expect, MiCA includes a prohibition on the offering of interest rates to holders of stablecoins.
In a more general sense, like any government, the EU is also concerned about the potential for scams, market abuse, and market manipulation. This is an unfortunate reality in any financial market, but when things go badly wrong (as they did in 2008 and more recently during the pandemic), the general public looks to the government for assistance and for someone to blame. Currently, taking action to prevent abuse in crypto markets is hard under current laws and therefore it is not surprising that the EU wishes to take action. This is, in part, due to the EU operating on what is know as ‘civil’ or ‘code’ law. Unlike a ‘common law’ jurisdiction like the United States or the United Kingdom, where older laws can be re-interpreted by courts to apply to new financial instruments or technological development, code law jurisdictions like the EU must have specific rules and regulations written into law including every possible edge case that might appear. Several years ago, the EU concluded that while some crypto assets such as security tokens are covered by existing laws (MiFID II), the vast majority are not, and therefore new regulation is necessary.
Finally, we can conclude that the EU sees the creation of a regulated and transparent ecosystem as a step in the right direction in its fight for global talent and leadership. In general, companies would prefer to set up in jurisdictions where rules are clear and they do not have to fear future restrictions or forced changes in their business practices. Following the passing of MiCA, issuers of crypto assets and crypto asset service providers (CASPs) will have very clear guidelines on how to operate, not just within one EU country, but within all 27 and under a single licensing regime. This, the EU hopes, will establish the bloc as an attractive place for blockchain and cryptocurrency innovation at a time when Europe is losing the battle for global talent. Furthermore, the EU, through MiCA and also instruments like GDPR, can continue to promote its idea of a ‘free, but regulated’ Euronet as an alternative to the Wild West nature of the internet in America and the highly-restricted nationally sovereign Chinese vision of the internet.
The Finance Industry
So how about where this will have the most impact - the market itself? Let’s look at it from both the sides of people in traditional finance (TradFi) and those in crypto and other forms of decentralized finance (DeFi).
It’s no secret that operators and service providers in TradFi would like to dip their toes into blockchain. Decentralized Ledger Technology (DLT) offers huge improvements in terms of speed and efficiency, allowing trading and settlement to be done at lighting fast speed, with lowered overhead costs, and operation on a 24-hour basis. Furthermore, there are clearly many opportunities in the DeFi market that the big players in TradFi are eying enviously - big gains, new products, innovative ways to fractionalize and attract a whole new type of customer. However, finance is a heavily regulated industry - and understandably so. Risk aversion rules, and no large organization is going to make big moves into the DeFi space without a clear set of guidelines as to how and when they can. Luckily for the TradFi market, MiCA offers just this, allowing these players to get involved in the issuing, buying, selling, and service provision of crypto assets while being in full compliance with a set of laws that applies across the entire of the EU. This should be a welcome development for the industry.
How about from the side of DeFi, where those involved already have these speed and efficiency advantages? What could they have to gain? Well, a lot. Why should investments into DeFi remain in the DeFi space? It is safe to assume that DeFi players would like to have the same opportunities, just like anyone else, to diversify their assets. If gains have be made in the crypto space, why shouldn’t these people be allowed to use these gains to look at equity or bonds or other more traditional financial assets? At present, there is a huge wall dividing these two spaces. The clear guidelines that MiCA sets down gives TradFi providers an opportunity to move into DeFi, and remove the need for them to maintain this wall of separation. This creates a more integrated financial market overall and expands opportunities for all those involved.
Let’s be clear: Dusk Network cares about MiCA. Dusk’ mission is to allow everyone to exercise complete control over all of their assets, and to do that, we have a vision to accelerate the world’s transition to an asset-backed token economy. Moving in this direction will require working with our partners in the TradFi industry to allow them not only to tokenize their products, but to provide them with the advantages inherent in DeFi that they currently dsire, and to do this to such an extent that the terms ‘TradFi’ and ‘DeFi’ are no longer necessary. A single, unified financial market, where everyone can control their assets and use them however they wish is the dream of Dusk, and as such, we welcome regulations like MiCA as a step in this direction.
A large part of what Dusk is doing is building regulations into its products, so that our partners can use our technology safely in the knowledge that all the rules and regulations that apply are built in. In short, compliance together with privacy, should be baked in at the foundational level, so that products built on top of Dusk don’t even need to think about this. This is what we aim to do, and this is why we continue to observe MiCA and other EU legislation very closely.