Will the world follow the EU’s lead in regulating crypto?
by Sophia Le Vesconte, Senior Associate with Linklaters
The US and Asia may have the edge in setting technology and cultural trends, but when it comes to regulation, the EU considers herself to be the hottest trendsetter in town.
The General Data Protection Regulation (GDPR) is a case in point. Since it came into force in 2016, countries spanning five continents have rolled out standards modelled or inspired by it. This is the ambition for the Markets in Cryptoassets Regulation (MiCAR).
MiCAR has been a long time coming, as is typical of European legislation. It was first proposed by the European Commission in 2020. Following two years of negotiations among the EU’s lawmakers, it is now due to take effect in early 2023 and will start to apply in 2024.
The regulation has certainly attracted a lot of interest across the globe.
It provides a highly comprehensive framework for regulating a broad range of crypto assets, amalgamating aspects from numerous financial regulations that apply in traditional financial markets. It includes rules on public offers, a wide range of services, market abuse and material acquisitions.
Some have criticised it as heavy-handed and stifling of innovation. Others have welcomed the protection it will bring to consumers and the certainty it will bring to the market. There is some truth in all of this.
There is no denying that MiCAR will significantly impact the industry and could kill off certain business models. The regulatory burden for service providers is substantial. For some, it will simply become uneconomical or impractical to service the EU.
Stablecoin issuers will need to meet high standards, including in relation to safeguarding or reserve management, and new caps will prevent certain types of non-euro denominated stablecoins from reaching significant scale. Many market participants accustomed to operating in a regulatory vacuum (including individuals) will now need to take great care to ensure their words and actions do not fall foul of market abuse rules.
But, at a headline level, this was all very much the point. The intention was to impose a filter; to support responsible innovation while restricting practices that were inconsistent with EU public policies. These policies include goals around consumer protection, financial stability, “strategic autonomy” (the capacity for the EU to act autonomously without dependence on foreign entities, for example) and monetary sovereignty.
Recent events have prompted other jurisdictions to re-evaluate their own public policies towards crypto. In the immediate aftermath of the FTX crash, some European policymakers wasted no time in commenting that the event would not have happened if MiCAR (or equivalents) had been implemented on a global scale.
This message will no doubt have resonated with regulators the world over. But not just regulators. Many industry players have for some time been lobbying for a means of gaining a regulatory seal of approval that differentiates them from bad or incompetent actors.
This demand has only grown as recent turmoil has hit consumer confidence in the market. Several of the policy goals behind MiCAR are also reflective of recommendations recently published by the Financial Stability Board, as part of a call for more international coordination on crypto regulation. All of this suggests that we are likely to see many other jurisdictions follow suit in bolstering regulation of the crypto industry.
The more difficult question is whether they will judge that MiCAR has got it right on the detail and adopt it as a regulatory blueprint, as many did with GDPR. Regulators and industry participants alike are still grappling with issues like: how the framework will apply at the boundaries; to what extent specific requirements and thresholds are workable in practice; whether a bespoke technology-specific framework can deliver a level playing field; and how the framework will hold up in a rapidly evolving market.
In the UK, there have been calls for policymakers to adopt a more nuanced approach and to tackle some of these issues head on. This, however, is by no means an easy task.