Are the United States and the European Union working on creating standard crypto regulations? Since the crypto sector burst into existence in the past decade, lawmakers and regulators in the US and EU have simultaneously been excited and concerned by the burgeoning technology. In fact, the growing interest of institutional investors in digital assets and the COVID-19 pandemic has made the need for a standard framework more urgent.
September 25, 2020 | AtoZ Markets – The crypto community needs to accept an inconvenient truth; that regulation will be its great chance to go mainstream. Even if we perfect the technology and get rid of all the problems associated with it, like volatility, lack of inherent value, cybersecurity issues, until the technology is adopted by federal governments and regulated, there will be an increased risk in investing in digital currencies.
Warren Buffet once said:
“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.”
The point is, not only because the technology is tricky, but also because it is not legally regulated. For this reason, mainstream companies wouldn’t venture into an unregulated territory.
US, EU nears completion of cryptocurrency regulatory framework
Luckily, just last week, we saw two major regulatory developments for the cryptocurrency industry in both the United States and the European Union.
In the United States, the Conference of State Bank Supervisors (CSBS) announced the launch of MSB Networked Supervision. This is a standard set of compliance guidelines in the US for large Money Service Businesses (MSBs). These guidelines will standardize compliance procedures across state lines, and make it possible for state-licensed money transmitters to achieve compliance in multiple states at a time.
Around the same time, in Europe, 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.
Related article: European Countries Call for Strict Cryptocurrency Regulations
The aim of the EU’s draft legislation is to provide legal clarity around cryptocurrencies (including security tokens and stablecoins) that is in line with Europe’s Markets in Financial Instruments Directive (MiFID). MiFID acts as a legal regulatory framework for securities markets, trading venues, and investment intermediaries.
Both of these developments could have big implications for the global cryptocurrency industry. Nevertheless, note some significant differences in the two regulatory developments that will greatly impact how the EU and the US may view the future of digital assets.
Examining the European Commission’s leaked draft
While different, both the MiCA and the CSBS’ MSB Networked Compliance program seeks to foster an approach to regulatory standardization across jurisdictions. Collin Plume, founder, and chief executive of Noble Gold Investments explain:
“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.”
Moreover, Bob Morris, chief compliance officer at Apifiny has explained 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.”
Truly, the MiCA draft itself admits the clash of interest when it comes to 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.”
In addition, the draft notes 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.”
As a result, 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 does this create competition?
In the United States, the CSBS regulations also examined why it is important to standardize regulations in the US.
However, while different from the EU’s MiCA guidelines, the CSBS’ new guidelines are not only for crypto firms but more generally for regulated money service businesses (MSBs). What is more, while the MiCA tries to propose a comprehensive set of laws and legal taxonomy for the crypto sector, the CSBS’ new program mostly addresses compliance measures.
Also, the new program is only applicable to money transmitters ‘operating in 40 or more states’, which could leave smaller MSBs to the wayside. An official statement from the CSBS reads:
“[…] The initiative applies to 78 of the nation’s largest payments and cryptocurrency companies that currently meet the 40-state threshold.”
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.
Following the launch of the MSB Networked Supervision program, 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.”
This raises the questions: why 40 states? Why that arbitrary number? What does that mean for the smaller firms that may not have operations in 40 states? Does the 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?” And lastly, “how exactly does this promote competition?”
It is in line with the [European] Commission priorities to make Europe fit for the digital age
From the look of things, the CSBS’ new guidelines may not likely promote competition and this may indicate a sharp contrast in the ways that the US and the EU view the role of digital assets in their respective futures.
Undoubtedly, the US seems to be making things easier for the bigger firms in its domestic crypto industry (from the top to the bottom). On the other hand, the EU seems to be moving toward a more comprehensive regulatory strategy – one that could foster innovation from the ‘from the bottom to the top.’
What is more, the terms used in the MiCA draft suggest that the EU views a healthy digital assets industry as a vital part of its economic future and this is largely absent from any of the US’ statements or guidelines on digital assets.
To be specific, 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.”
The MiCA also clearly 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.
The future of crypto regulation
From the foregoing, the US and the EU have their attitude toward cryptocurrencies. While some countries do not want to accept the asset as it is, to brand it as illegal, these two countries want to create the legal framework and also benefit from the fact that the cryptocurrency market makes a profit.
And indeed, if the EU does take aggressive steps toward comprehensive crypto regulation, the US may have no choice but to up its game.
Related article: European Union to Provide Clear Crypto Regulation in 2024
One can only hope that sooner or later, all countries of the world will understand that cryptocurrencies are firmly entrenched in our lives, and we should accept them in one form or another. Dave Hodgson, the chief investment officer and managing director of NEM Ventures, believes that regulation will take place gradually:
“We will continue to see progressive governments furthering their regulations and mechanisms for allowing citizens to utilize payment and non-payment blockchain solutions in general. The countries that have been slower to address and formalize these regulations will continue to lose business and citizens to those jurisdictions taking a more progressive approach. I believe that these economic factors will continue to incentivize the slower movers to catch up.”
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