The Breakdown - A Landmark Moment for Crypto in Europe as MiCA Passes

Episode Date: April 22, 2023

With the passage of MiCA, Europe has jumped out ahead of the U.S. and other jurisdictions when it comes to regulating crypto.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh.  Join the discussion at discord.gg/VrKRrfKCz8.  

In the wake of one of the most tumultuous years in crypto history, the conversations happening at Consensus 2020 has never been more timely and important. This April, CoinDest is bringing together all sides of the crypto, blockchain, and Web3 community to find solutions to crypto's thornyest challenges and finally deliver on the technology's transformative potential. Join developers, investors, founders, brands, policymakers, and more in Austin, Texas, April 26 to 28th for Consensus 2020. Listeners of the breakdown can take 15% off registration with Code Breakdown. Register now at Consensus.coindex.com and join CoinDesk at Consensus 2023. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the

Big Picture power shifts remaking our world. The breakdown is produced and distributed by CoinDes. What's going on, guys? It is Friday, April 21st. And today we are talking about a landmark moment for crypto in Europe, as Mika has officially passed. Now, a quick note before we dive into today's show, if you are listening to this podcast on the CoinDesk Podcast Network, you have got to switch over to the Breakdown Only feed. As I recently announced, the Breakdown has become the Breakdown Network, which means that this show will only be available on the Breakdown Only feed. After this Sunday, April 23rd, the show will no longer be on the Coin Desk Podcast Network. I'm very appreciative to CoinDesk for the years of partnership and very excited to,

for all of you to join me on this new breakdown network journey. By the way, a new episode of Bitcoin Builders came out today, so definitely check that out. All right, so the last couple of days on this show, we've been focused on hearings in the U.S. On Tuesday, Gary Gensler finally was dragged before Congress for an SEC oversight hearing, which lasted about four and a half hours, and which, while wildly cathartic, probably wasn't all that productive. It was a chance for Republicans to lay out why they think that in some ways Gensler has been asleep at the wheel, such as FTX, and in other ways he's been an active opponent of the mission that the SEC is supposed to complete. Democrats, of course, don't agree. And a big theme of our conversation has been how

crypto and Bitcoin are getting more politicized than ever in the United States. The second hearing on Wednesday was a little bit more productive. It was nominally about the new stablecoin legislation, which was in fact old stablecoin legislation, which was just reintroduced. That hearing had a number of witnesses who were, I don't know, actual experts in crypto, believe it or not. Those included Austin Campbell, who was on the show a couple weeks ago and who used to work with Paxos. It included Jake Chervinsky from the Blockchain Association, who's probably in contention for my most quoted person on this show. And even the witnesses that they had who were nominally supposed to represent perspectives outside the crypto industry weren't antagonists in the way they've

sometimes tried to get. Adrian Harris, who helms the New York Department of Financial Services, made it pretty clear that crypto isn't a problem for her as long as it follows the rules. Which, frankly, even if you don't like her particular rules, it's refreshing after what we've seen from people like Gensler who really just want this industry gone. Now, one of the things you'll often hear from that type of person, be it Gary Gensler or Elizabeth Warren or Brad Sherman, is that the crypto industry just doesn't want to play by the rules. Gensler is very fond of saying that the issue with regulations for crypto in the U.S. isn't that

there's a lack of clarity. It's that there's a lack of compliance, that the crypto industry should, by all accounts, know what its rules are. It just doesn't want to follow them. Anyone who spent, I don't know, five minutes or so in the crypto industry knows that this just isn't the case. Entrepreneurs in this space, investors in this space, traders in this space, content creators in this space, don't want no rules. They want to know what the rules are. Austin Campbell made this analogy in the hearing. Imagine you're going to play a game of sports

with your friends, he said. But when you get to the game, the ref says it could be the rules of football. Could be the rules for baseball. It could be the rules for basketball. Or it could be some combination. And by the way, we're not going to tell you which we're going to enforce. Oh, and also, it might switch in the middle of the game. That is obviously. an untenable situation for the players of that game, as well as for crypto companies in the United States. What people have been hungry for is something clear and comprehensive, and that's actually what Europeans just got. On Thursday, the European Parliament passed the groundbreaking markets in crypto asset regulation and licensing regime, or MECA. This makes Europe the first

major jurisdiction in the world to introduce comprehensive crypto regulations. The vote passed by an overwhelming 517 to 38 majority with 18 abstentions. The legislation will now move to the Council of the EU for ratification by EU member states, which will go to a vote on May 16th. Still, that is largely just a formality because those states have already approved this exact text. Now, the legislation is made up of a few key pillars. One is a licensing regime. Exchanges, wallet operators, custodians, stablecoin issuers, and some other types of crypto firms will be required to register with the regulator and obtain a license to operate. These applications will require firms to have strict know-your-client and anti-money laundering

protections in place before being accepted. There will also be a new set of consumer protection and market abuse standards. In other words, all the things that one would expect from any sort of regulatory or licensing regime. Now, when it comes to stable coins, that's obviously been a big concern for the EU. In fact, one critique that I've read of Mika is that where it started was really concerns about Facebook's Libro when that project was announced in 2019. And even long after that project had changed its name and then eventually been shut down, some number of EU regulators were still kind of chasing Facebook Libra's ghost. But regardless, stablecoins are obviously a big issue. And by the terms of Mika,

stable coin issuers will be required to maintain full reserves in cash-like instruments with liquidity requirements to ensure that one-for-one redemptions are always available to customers. Another aspect of the legislation is that there is a taxonomy embedded in it, which separates different types of crypto assets. This gives Europe the ability to provide each their own definitions and tailored regulatory treatment. So, for example, the crypto asset category covers most traditional cryptocurrencies as a catch-all classification. The utility tokens definition covers tokens that are, quote, only intended to provide access to a good or a service supplied by its issuer. Those receive a lighter regulatory touch. Asset reference tokens as a category

cover tokens pegged to baskets of currencies, commodities, crypto assets, or other single non-curricular. currency assets. This is the part where I was saying that there's maybe a little bit too much of a focus on Libra as no one else is really proposing this Bankor-style basket of currencies approach that was at the heart of the Libra proposal. Finally, e-money tokens refer to single currency stable coins with a set of regulations that closely mirrors existing requirements for non-crypto electronic money providers. There are also further designations. Within the categories of asset reference tokens and e-money, Mika introduced the concept of significance, meaning that when token issuer reaches over 10 million holders, 5 billion euros in market cap, 2.5 million transactions

per day, or a range of other qualifiers, it's subject to higher prudential, governance, and liquidity requirements. Now, the taxonomy is important not only because it enables a clear set of regulations for stable coins and other peg tokens to be established, but also because it allows a standardized disclosure scheme for standard crypto assets to be put in place. token issuers will now be required to publish a detailed white paper that provides all the relevant information about the project, the issuer, the risks involved, the technology used, the economic design of the token, i.e. its tokenomics. And finally, the environmental impact of the consensus mechanism. Notably, this environmental disclosure is the last remnant of an attempt to ban

proof-of-work consensus in this legislation. It was something of a consolation prize for a coalition of Greens and other parties that failed to negotiate a full ban. Of course, for those of us who care both about the environment and about proof of work, disclosures and customer choice feel like a very reasonable compromise. Now, regulators will need to be notified 20 days ahead of white paper publication, and although regulators will not individually approve white papers, they will have the authority to prohibit the issuance of a token. A range of consumer protections attached to the token issuance procedure includes duties to act honestly, disclose conflicts of interest, and clearly identify marketing. One interesting idea proposed is a 14-day cooling off period, where retail investors

can withdraw from an initial token offering. Now, there's been a lot of consternation and questions around these sort of cooling off period, so I expect that that's something we'll hear more about in the months to come. Anyway, the big takeaway from this section of the regulations is that initial token offerings will become legal with clear rules of the road in Europe, along with the ability to offer the sale of tokens directly to retail investors subject to some reasonably achieved disclosure requirements. Moving on through the legislation, exchanges and other crypto asset service providers will be subject to the obvious requirements that have been thoroughly discussed following the collapse of FTX and the wide range of bankruptcies that swept the industry last year. Consumer protections

like a clear disclosure on segregation of funds policies and provision of white papers are in, as are market protections like a prohibition on favorable trade execution and market abuse monitoring. I'll hang here for just a moment again to reinforce the point that the crypto industry is not some set of total DGens who don't want any rules at all. If you ask the average person if they want exchanges to be prohibited from commingling customer funds and corporate funds, the answer is almost certainly yes. If you ask people whether they think exchanges should be prohibited from trading against their own customers, again, the answer is yes. In other words, these types of rules that found their way into MECA are pretty well consensus and would be easy starting points for any sort

of compromise before you get into thornyer issues. Now, notably missing from Mika is any in-depth assessment of how to regulate NFTs or defy. These regulations were initially proposed over two years ago, so are primarily focused on dealing with the hot-button topics of the day, which included the 2019 ICO boom and the 2019 proposal of Facebook's Libra Stablecoin. In fact, at one point, European regulators made the explicit decision to mostly push questions of NFTs and defy to Mika 2 to focus on what they knew and what they understood and what seemed like a good starting point. Again, feels entirely sensible to me. So as I said, NFTs have been flagged as needing to be covered in follow-up legislation, and it could be as simple as adding them to the

taxonomy and formulating simple rules for their issuance, as well as considering how much leniency should be afforded compared to the rules for fungible token issuance. Now, Defy is somewhat in the crosshairs due to concerns around financial surveillance, but decentralized protocols and Dow's are explicitly exempt from Mika, presumably to be dealt with separately once the issues are more fully understood. There are considerations of fake governance decentralization and a fairly bar to prove that a project is properly decentralized, but that problem will be in many ways a matter for how enforcement is handed down the line. Centralized front ends for defy applications may be also covered by the regulations and licensing requirements, but that issue is still a little murky.

Now, of course, one of the most significant benefits of Mika is the regulatory harmonization across the Eurozone. Many European countries have existing crypto regulatory framework, registration schemes, and operating crypto regulators, but this new framework will allow for mutual recognition across the entire continent. National regulators will each conduct their own domestic oversight and licensing, so existing firms will be able to continue their relationships with their current regulator. So Mika, assuming it passes the final rubber stamp process in May, looks set to begin implementation in stages beginning a little over 12 months after their entry into law. Stablecoin issuers look set to be required to register from June next year,

with other crypto firms being required to obtain licensing by December 2024. In the interim, firms can still register with domestic regulators, and the harmonization process between national schemes is already well underway, meaning there should only be minor adjustments for firms that are already overseen by national regulators. One additional note, in a vote on the same day, the transfer of funds regulation which implements the crypto travel rule was also passed. This rule has been controversial and beefs up anti-money laundering requirements by forcing crypto firms to transmit customer details alongside transactions for the purposes of financial surveillance, with no minimum transaction size to trigger reporting requirements.

Transfers between exchanges and self-hosted wallets will be reported if they exceed a 1,000-euro threshold. Although a more controversial proposal to require reporting of peer-to-peer transactions between self-hosted wallets was removed from the legislation before it passed. I have to say, all in all, the mood is pretty bullish around this. Stefan Berger, the politician who shepherded the legislation through the parliamentary process, said, quote, this puts the EU at the forefront of the token economy with 10,000 different crypto assets. Consumers will be protected against deception and fraud,

and the sector that was damaged by the FTX collapse can regain trust. Consumers will have all the information they need, and all underlying risks around crypto assets will have to be monitored. We secure that the environmental impact disclosure will be taken, taken into account by investors in crypto assets. This regulation brings a competitive advantage for the EU. The European crypto asset industry has regulatory clarity that does not exist in countries like the US. Patrick Hansen, the director of EU policy at Circle, said in a blog post, Mika is without any doubt the most comprehensive regulatory framework for crypto assets we've seen on a global scale. It is an

opportunity the industry should seize and build on, not least, because if this regulation was being discussed and negotiated today instead of a year ago, believe me, we would have been in a whole different situation. Binance CEO, CZ said the European Parliament voted for Mika to be implemented. This means one of the world's largest markets is introducing tailored regulations for crypto to protect users and support innovation. The fine details will matter, but overall, we think this is a pragmatic solution to the challenges we collectively face. There are now clear rules of the game for crypto exchanges to operate in the EU. We're ready to make adjustments to our business over the next 12 to 18 months to be in a position of full compliance. Mikey Polito from Blockworks writes,

the devil is in the details, but the more I dig into Mika, the better it looks. What a sad contrast between this forward-looking legislation and Gary Gensler's testimony this week. It's not every day you see Europe take the lead on tech from the U.S. Gemini co-founder Tyler Winklevoss says while U.S. regulators have been busy infighting and refusing to provide the most basic of clarity for the crypto industry, the European Union just approved the Mika regulation, which provides a comprehensive regulatory framework for crypto in Europe. It's sad to see the U.S. being left behind on such an important technology and its promise. Socio-CEO-CEO Alexander Dreyfus says, boom, Mika is approved.

Great news for the crypto industry and also a final point to all haters claiming crypto is not regulated, it's a scam, it's a dead, blah, blah, blah, blah, blah. This is just the beginning of the journey. Austin Campbell said, as I discussed in my house testimony yesterday, other nations are moving ahead with clear, well-defined rules on crypto, while the United States collapses into chaos. Still, the most succinct, simple, and clear tweet about the whole situation came from crypto lawyer Jeremy Hogan. Asta-Lavisto, United States, love crypto. Now, it's worth asking why Europe did this better.

One answer may be the place they're starting from. The U.S. is very comfortable in its role as technology leader in a way that it can't really imagine not being that anymore, even as the world passes it by. Now, Europe has tended to be behind in tech, often, frankly, for reasons of their own making. But that doesn't mean they don't have ambitions to change that. Again from Patrick Hansen's blog, he writes, Crypto regulation has to be seen in the context of the EU's ambition to be a global leader in tech regulation more broadly.

Recent political initiatives like the GDPR, the Digital Markets Act, or the Digital Services Act, aspire to set global tech standards and a nascent promising industry like crypto is just another building block to execute on that proactive strategy. Whatever the motivation, it's likely that one of the outcomes will be more startups moving to Europe and more institutions investing. In 2022, Bloomberg found that only 4% of institutional funds on the continent had exposure to crypto. That said, a full 60% said they saw it as a new asset class which would likely find its way

into portfolios eventually. The biggest barrier to investment? You guessed it, regulation. Now, helping accelerate Europe's push to be in a global leadership position is, I think, the UK's ambitions as well. As I discussed earlier this week, Coinbase CEO Brian Armstrong recently did a whistlestop tour of the UK. And the rhetoric coming out of that country has been very different lately indeed. In February, the UK laid out its proposal for how to regulate the crypto industry and opened up a consultation period that closes at the end of this month. This week, the Economic Secretary to the UK Treasury, Andrew Griffith, discussed the opportunity in crypto in, frankly, excited terms. Referring to Brexit, he said, we've got control back of our

rulebook, not something the UK has had for decades. So we've got the ability to move in an agile and proportionate way. And I'm definitely keen we make the most of that opportunity. Griffith pointed out they're open to new approaches even as they try to fit things into existing regimes. Wherever possible, he said, we want to see the same asset, the same transaction, regulated in the same way. But there are some additional opportunities in the crypto asset or distributed ledger space, and we want to take advantage of that. Griffith pointed to the Financial Services and Markets Bill, which is already working its way through Parliament. That bill would legalize and bring stable coins into the larger financial system. Overall, Griffith suggested we could see comprehensive

legislation in the UK within a year. It didn't have to be this way. in the U.S. The Responsible Financial Innovation Act from Senator Lummis and Senator Gillibrand, a bipartisan act last year, like Mika didn't shy away from the thornyest questions about things like whether crypto assets were securities or commodities or if they actually change their status over time. That bill still exists, that template still exists. What doesn't exist is the bipartisan will to do much about it. And frustratingly, when you look at the situation, it feels like in the U.S. we're being held hostage by a loud set of carnival barkers who have brought their priors and previous access to grind to this industry and are now determined to use every ounce of their political clout

to stop us from moving forward. But my friends, the world does not stay still. Crypto, one of the most cross-border nationless technologies of all time, will not stay still. So I guess all that's left to say is meet you in Europe. Until next time, guys, be safe and take care of each other. Peace.