Last week brought two major regulatory developments for the cryptocurrency industry in both the European Union and the United States.
In the EU, a leaked draft of a new set of rules for the crypto industry from the European Commission known as the “Markets in Crypto-Assets” (MiCA) was shared across the internet.
The EU’s draft legislation seemed to aim to provide legal clarity around cryptocurrencies (including security tokens and stablecoins) that is in line with Europe’s Markets in Financial Instruments Directive (MiFID), which acts as a legal framework for securities markets, trading venues, and investment intermediaries.
Around the same time, the United States’ Conference of State Bank Supervisors (CSBS) announced the launch of MSB Networked Supervision, a standard set of compliance guidelines for large Money Service Businesses (MSBs) in the US. These guidelines will standardize compliance procedures across state lines, making it possible for state-licensed money transmitters to achieve compliance in multiple states at a time.
Both of these developments could have big implications for the global cryptocurrency industry. However, there are some important differences in the two regulatory developments that have greater implications for how the EU and US may view the future of digital assets.
Digging into the European Commission’s leaked draft
In different ways, both the MiCA and the CSBS’s MSB Networked Compliance program attempt to provide some level of regulatory standardization across jurisdictions.
“It seems what’s happening can be described as nothing more or less than standardization. In layman’s terms, rules are catching up to a game already being played out in the open with rules on the fly,” explained Collin Plume, founder and chief executive of Noble Gold Investments.
Indeed, Bob Morris, chief compliance officer at Apifiny, told Finance Magnates that although MiCA’s leaked draft attempts to address a wide range of regulatory matters for the EU’s crypto industry, “the most significant part of these rules is the European Commission’s goal to passport these standards across the borders of the EU,” Mr. Morris explained.
Indeed, the MiCA draft itself acknowledges the disparate state of crypto regulations in the EU.
“While a few Member States have already implemented a bespoke regime to cover some crypto asset service providers or parts of their activity, in most Member States they operate outside any regulatory regime,” the MiCA draft reads. “In addition, an increasing number of Member States are implementing bespoke national frameworks to cater specifically for crypto-assets and crypto-asset service providers.”
The draft also acknowledges that the current, disjointed state of crypto regulations in the EU “hinders the service providers’ ability to scale up their activity at the EU level” and “results in high costs, legal, complexity, and uncertainty for service providers operating in the crypto-assets space.”
Therefore, the draft says, “through the introduction of a common EU framework, uniform conditions of operation for firms within the EU can be set, overcoming the differences in national frameworks, which is leading to market fragmentation and reducing the complexity and costs for firms operating in this space.”
”How exactly does this promote competition?”
The United States’ CSBS regulations also addressed the need to standardize regulations in the United States.
However, unlike the EU’s MiCA guidelines, the CSBS’ new guidelines are not only for crypto firms, but for regulated money service businesses (MSBs) more generally. Additionally, while the MiCA attempts to introduce a more comprehensive set of laws and legal taxonomy for the crypto industry, the CSBS’s new program mainly addresses compliance measures.
Additionally, the new program only applies to money transmitters “operating in 40 or more states,” which could leave smaller MSBs to the wayside.
“[…] The initiative applies to 78 of the nation’s largest payments and cryptocurrency companies that currently meet the 40-state threshold,” reads an official statement from the CSBS.
While “these companies combined move more than $1 trillion a year in customer funds,” the “40 or more states” clause of the program means that the scope of the MSB Networked Supervision means that the scope of the program could actually be quite limited.
At the time that the MSB Networked Supervision program was launched, Securrency Director of Policy and Government Relations Jackson Mueller said that “there has been no indication, at this point, on what led state banking regulators to decide on 40 states as the arbitrary threshold.”
Therefore, “my questions from this: why 40 states? Why that arbitrary number? And 2. what does that mean for the smaller guys that may not have operations in 40 states? Does same supervision apply? If so, are we putting smaller firms at a competitive disadvantage vs their larger peers as a result of the requirements for this initiative?”
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And indeed, “how exactly does this promote competition?”
“It is in line with the [European] Commission priorities to make Europe fit for the digital age.”
Indeed it seems that the CSBS’s new guidelines may not, in fact, promote competition–which may inidcate a stark contrast in the ways that the EU and the US view the role of digital assets in their respective futures.
Indeed, while the US seems to be making things easier for the largest firms in its domestic crypto industry (taking a ‘top-down’ approach) the EU seems to be moving toward a more comprehensive regulatory strategy–one that could foster innovation from the ‘bottom-up.’
Additionally, other language in the MiCA draft seems to indicate that the EU views a healthy digital assets industry as a crucial part of its economic future–language that has been largely absent from any of the United States’ statements or guidelines on digital assets.
Specifically, the MiCA draft says that “it is in line with the Commission priorities to make Europe fit for the digital age and to build a future-ready economy that works for the people.”
And in fact, the MiCA explicitly states that establishing the EU as a global leader in the digital assets space is a priority from the EU.
“The digital finance package includes a new Strategy on digital finance for the EU financial sector with the aim to ensure that the EU embraces the digital revolution and drives it with innovative European firms in the lead, making the benefits of digital finance available to European consumers and businesses,” the MiCA draft reads.
“A gauntlet throw-down for tech firms based in the U.S. as well as countries in Asia, Latin America and MENA”
Noble Gold Investments’ Collin Plume commented on this starkly “protectionist” language.
“The seemingly protectionist strategy as proposed is one of the most eye-popping of the proposed rules,” Mr. Plume said to Finance Magnates.
“When the EU commission says outright that it wants to ‘ensure that the EU embraces the digital revolution and drives it with innovative European firms in the lead,’ it is the equivalent of a gauntlet throw-down for tech firms based in the U.S. as well as countries in Asia, Latin America, and MENA.”
“Huge financial allocations are spent to compete in the blockchain and crypto industry, and they would be at risk without the protectionist strategy in place. It must be an ethereal feeling for the EU-based tech community to know their government has got their backs,” he said.
Mr. Plume also explained that this kind of protectionist language may also inspire other world powers to begin taking their domestic digital assets industries more seriously: “I look forward to a formidable response from the U.S. regulators–hopefully, sooner rather than later.”
“It’s an open secret that competition amongst nations and blocs of nations is in a state of frenzy.”
And indeed, if the EU does take aggressive steps toward comprehensive crypto regulation, the US may have no choice but to up its game.
“It’s an open secret that competition amongst nations and blocs of nations is in a state of frenzy thanks to the innovation brought about by blockchain and bitcoin, in particular,” Mr. Plume said.
“The entire ecosystem of the so-called ‘Internet of Money’ is just starting to pop into the mainstream,” he continued. “I am not alone in seeing the potential in the utility of the digital assets over the short-term profiteering from speculation. This is what the EU regulations draft are underscoring in no uncertain terms.”
Therefore, “the EU and the US rules are likely to mirror each other and adjust on the fly,” Mr. Plume said. “This underscores the vast impact of the crypto-led evolution of money. This is something that MSBs, giant financial institutions such as banks, credit unions have to reckon with as much as the latest developments in the fintech app space.”
The push to regulate for innovation could become even more ‘frenzied’ as uncertainty in some of the world’s largest entities continues.
“The EU appears to be on track to adopt and implement the digital asset regulations by 2024, which is ironically going to be the next U.S. presidential election year,” Mr. Plume said.
“As uncertainty lingers over how the November election will turn out and how geopolitical risk affects various asset classes, what we’re seeing more and more of is how virtual currencies can push innovation that prompts disruption. The news from the EU shows how that disruption can bleed into governance and force governments to adapt to digital currency transformations.”