Protecting the Future of Crypto-Assets in Europe

Transcript

all right all right um hi everybody um thanks for showing up on a talk on crypto regulation on a sort of last hour of the of the conference i'll try and make it as entertaining and succinct as possible but um yeah if you have any questions at the end uh let me know so my name is demarco i'm based in brussels so i work for a company called fti consulting i'll tell you a little bit more about that i guess the main thing about me uh at this stage is that i'm not the executive director of uh excuse inaudib so if mark was here he would have told

you that another stands for the international association of trusted blockchain applications and it's a trade body and a platform based out of brussels as well that we work closely with and it was put together in order to give a voice and a coordinated voice of the 163 companies until that moment that care about the future of distributed ledger technology now all my talk is going to be about financial services which is one of 15 uh work streams or working groups that inaudible has but um there's more to it the organization to it we work very closely together indeed i work for a big international consultancy firm but what that means in practice is that we follow very closely

um all development political and policy development from brussels to washington that could affect the future of distributed ledger technology and we'll talk a little bit more about the european context today so the view from brussels um i mean those past couple of days here have had really high energy have been really interesting and amazing um the view from brussels is slightly different and i'll tell you how first thing first when you talk to governments about potentially changing who issues money and the rails on which money are moved or the payment rails they get start thinking about control and they start thinking about trust this is true for brussels the eu officials call that

strategic autonomy digital strategic autonomy but it's also true for southeast asia it's very true for china south korea the states i mean you kind of see that trend over and over again um and the the idea for big social uh platforms to to create their own tokens really put a lot of governments on the same level of alert that it's really quite a bit more about control in my opinion that is about financial inclusion for example now um when you're in a room like that in a conference like that you tend to focus on the stellar growth the distributed decentralized finance has had the growth over the past

year and a half from a billion to 68 billion couple of days ago and that's all positive stuff but when you grow that quickly it makes it that much harder to stay under the radar politically regulatory speaking so these are some of the concerns that policy makers in brussels have and while it is uh for example the objective of our cooperation with inaudib to to contribute to the narrative to to make it data-driven and supportive we have to understand where these concerns are coming from because that gives us the room to maneuver we have to know what policymakers are concerned about so then we can have an

idea of what we can and cannot change and the best way to engage is to address to recognize those concerns to address them agree or disagree with them and explain why for example i mean this shouldn't be a guess a hard guess for anybody who's looking into this space stable coins the eu calls them e-money tokens or asset reference tokens are the biggest areas of concern and it really doesn't matter whether you're issuing them as a centralized entity or a decentralized entity really because the pro the concern is what you do with the token when it's out there and so so this there was perhaps an idea at the beginning of the regulation that

um some of the the d5 projects could be left more out of scope because regulation is indeed written for a centralized entity and really at all doesn't sit comfortably with the defy uh concept but the the prevailing concern is that it allows private entities to start functioning like central banks and even where they don't intel it allows private entity to continuously control payment rails um and the that concern i have to say from an eu perspective is as um as big when it comes to private sector as it is about foreign governments and that's why you have the european central bank talking about issuing a digital euro as a form of protecting

basically the sovereignty of the eu which is why non-euro stable coins like all the private uh solutions we have or the majority of them are a particular concern and that's where we start thinking about presidents do we have them don't we have we don't have a precedent of moving money to each other in the eu in in currencies that are not the eu the euro the eurozone currencies or sorry the the eu currencies we don't have a precedent of of holding our money in something other than euros or or eu currencies but we do have a brussels level concern of what happens to the euro international role of the euro when you have big particularly private sector players issuing stable coins that

are backed by a dollar another uncomfortable topic is collateralization particularly who controls it in a d5 project it's it's the user who controls it in a traditional finance project it's the central entity who controls it reconciling those two things together is not an easy process it doesn't sit so there's no comfortable solution at this point of the negotiation process um how much collateral should you keep where can you invest your collateral all of these things are being negotiated at the moment and then will be set um in it will be set in law in one way or another the legal entity conundrum is yet another one as you can imagine regulators are used to having someone to

blame or someone to take the responsibility when that is a decentralized community with a lot of governance tokens around them that process becomes a little bit harder to to figure out i don't want to kind of create the impression that brussels doesn't understand that they do but the important thing is that you have to make them care about adopting a way of doing things that is different than traditional finance um other risks around mlk i see we had the eu just published their what we call the anti-money laundering package this week and for those that are focused on the space of

exchanges or or service providers that means the travel rule so so anybody looking in the exchange space would recognize that word it means the the the disclosure requirements when movie when money is moving from or tokens are moving from one service provider to another you have a lot more disclosure rules there um sustainability is an interesting one um because it rose to the to the sp to the political horizon very fast not that it wasn't recognized by the community not that it wasn't there for for a long time but it kind of became a hot topic in brussels for over a month i would say um and um and the level uh what we do with it to the extent that we understand that

protocols are different and they have different sustainability footprint the conversation that we're having that actually the solutions could be within the community itself these are all in very nation nation state in brussels um very few institutions are talking about lending there's far more lending activity in in the on the business side that there are conversations about in all the regulatory side but it's coming because regulators recognize they know to be fair afraid of shadow banking which is a concept that we had after the financial crisis so crypto lending could be defined as shadow banking and that already signals alarm bells in a regulator's mind and the conversation about all of these

risks the underpinning kind of the dynamic is the recognition of whether or not there is a value to society of all these tokens now if you come to a conference like this and you post a question the answer seems obvious that there is it's less obvious in policy in in rooms where negotiations happen and therefore um having platforms that continuously advocate and represent and have case studies and so on about this fact is that much more important in brussels um so the the law that i keep on referencing is still being negotiated it's called those markets and crypto assets regulation in the eu it's called mika abbreviated as mika it's been almost 12 months on the negotiations table

uh the council doesn't agree with it the the parliament hasn't figured out what they think about it they had nearly 1200 amendments on 168 pages if that gets anyone excited um and um so so it is it has been quite a lengthy negotiation process and it's still not over which means that there is room for influence but as we always say in my line of work the closer you get to the final line the room the the smaller the room for influence gets the interesting thing here is the the eu has a bit of a head start advantage there the u.s is behind us in terms of thinking about this other jurisdictions too um and this is what we call the brussels effect and we love talking about it

because obviously we live in brussels and we think everybody should do it as we do um but indeed um the eu has quite a track record of thinking up regulation which then reverberates around the world around data around banking standards banking capital for example and mika is a good candidate for something like that happening in other jurisdictions but the longer we are delay the agreement on mika um the more other jurisdictions might be particularly the uk um could be um catching up on on their thinking um uh inatpu um engages with mikko through their uh finance working group which i guess like i said is one of um is one of 15 um it that there's about 100

over 100 people there it does focus on mika but also anti-money laundering um the impact on the defy community more broadly um and and and also things like smart contracts and tokenization they also set up a mika task force beyond the limits of their own membership so that was more of an open platform that allowed non-members to also contribute to the debate and be taken into consideration and as part of the work they said there's a finance working group there's an academic advisory board which um which kind of put inputs their thinking into

um into the final positions and i'll tell you what positions are in a moment and there is a small secretariat that is very very busy putting that all thing together now policy positions are the things that you go and you talk to a policy maker about and that's a very commonly understood process um in brussels when you're running a trade body that has 168 and eight members of 63 sorry and then when you open a platform for outside of your membership it point then you go through quite a lengthy period of reconciling all these positions and coming up for the ones that matter to the biggest number of stakeholders and those are the five that um inaudible law

but those are the ones that matter the most to the members that this organization has so it has to do with things about it has to do with the definitions of crypto assets we had this talk here if anybody was in the room earlier about um the the moon party and whether the ticket to the moon party is a security or or something else that that question has its home in the first issue that inaudible has pinpointed um i already talked about some of the requirements that are difficult to comply with if you're a d5 project credit institutions as well as holders of other licenses um do can comply can can do you can provide crypto

services or issue tokens without a separate license and in the opinion of another members that shouldn't be the case lack of transitional arrangements means that the rules apply from the moment that they're agreed and that if you understand the urgency and the concern of the european policy makers that someone will come and start behaving like the european central bank then you understand why they want the rules to be applicable from the moment that they agreed um and then um and then there are some limits on how much you can raise basically um through a crypto project and one of the things we are advocating for is that you take a note from existing uh

legislation um and then you increase this limits again history really helps when you understand brussels none very few issues are really new um so some of the one of the tricks is to recognize how the debate we're trying to have at the moment fits with the debate that is had in the past and in this case how much you raised with an initial offering is a really hot topic um across across member states and that was that that makes makes the issue more political the other really important thing when you advocate in brussels is that you don't only figure out problems use offer solutions and that's been a big part of our strategy within atpa for example for activities of in

definition on the definition issue we propose that the definitions are more activity based so you get regulated based on what you happen to do with the token if if you're a token that you're trading on a crypto exchange for the purposes of creating um an investment value in it then it's one type of token if it is a stable coin that is backed by a combination of commodities cryptos and um um and another stable in other in currencies but you use it for payment that's a different kind of token for example um then the the solutions on the defy space are particularly interesting

because there is an open door for the defy community to particularly engage with the commission and think through the really non-trivial question of how you apply regulation which is written for entities in a structure where entities do not exist because just because entities don't don't exist doesn't mean that governance doesn't exist just exist in a different shape or form so there is there is the promise that this kind of process can take space after miko is negotiated so the things that we're really focused on at the moment is what will be agreed during mika and and how much of that future process will be

influence but discussions that we're having today the credit card institution the credit institutions one is particularly tricky um uh to be very honest with you um it i think the views of the industries are understandable but to get credit institutions to get for another license it's a very kind of political issue um this one there's more movement on than on the traditional the transitional engagements one has more kind of more scope for maneuver because one of the things that we're looking at at the moment is where all the member states sit where the various political groups in parliament sit where the commission sits so we're kind of reconciling all these views um just give me a second um to um um to to kind of figure out

where what the final rules are none of no none of what we see in the proposal is finalized and regulations can really change up until the last moment um and the last issue as i mentioned is to align what's in mika with what's the last solution rather is to align what's in mika with solutions that are out there in a pre-existing documents let me just get to the end and then we can do questions okay all right sorry um art stands for um asset reference tokens so i was saying earlier stable coins in the language of the european union can be two types you either are backed by a single

um currency some single fears currency in which case you're called an e-money token because in the eyes of the regulator you behave like money and therefore you get regulated by like e-money or you're backed by a number of fiat currencies or a basket of other things commodities other crypto assets in which case you're in asset reference tokens and the rules are different sorry if there was any other acronyms that i skipped i'm sorry that's a little bit of a work bias that we all have um so could engaging with governments and regulations needless to say it's really important it defends the rights of this industry to operate in the eu

it doesn't match much matter where you would be incorporated for example it looks like as long as you provide services to europeans wherever in the world you may be you might be captured by the new lawn that's really important i feel for the industry to recognize um and like i said um inaudible works across a number of other topics other than financial services um and and in one way or another they sometimes they integrate particularly when you look at the energy conversation the identity conversation they all they all kind of connect to um issues on financial services um so that's that's the end of what i had to share

um you can scan all these links or emails and get in touch with inaudible you can also find me after my talk and i can either connect it to them or tell you a little bit more about what we do at fti in brussels all right if you're looking to issue a stable coin to people inside the eu what would you say the sort of path of least resistance from a regulatory perspective is so do you go sort of for a basket do you do it euro denominated do you do it back by real assets or backed by sort of decentralized assets like a die which one would piss off the regulators

least i'm i'm not a lawyer this is not legal advice from your experience yeah um let me let me maybe paraphrase your question the the the thing that regulators are most worried about is finding um creating something that behaves like money that's not exactly money so the payments uh something that approximates the euro but it's not the euro and it's not controlled and issued by the european central bank worries them more than something that represents the baskets of a basket of other stuff and therefore you see that in the proportionality of the rules the other thing of course that worries

them is how big of a stable coin you create so the higher volume the higher market cap the more member states that you are in um the higher the regulatory rules becomes one of the distinctions that there are in mika proposed is that what you do with significant stable coins and and smaller stable coins is slightly different the the regulatory attention to them is slightly different thanks um yeah related to that what would there be a difference between creating like a euro stable coin which was either a backed by actual euros or b not backed by any actual fiat um asset but backed by uh some sort of

defy system yeah so so um i'm smiling because i've heard that question before but the thing is um what you say you're equal to dictates the collateral that you should have so you kind of have to think of a regulator here because the main thing is if i'm your customer and you tell me that my token is equal to a euro i have to be able to get my euro back in exchange for my customer at any given time so what you hold to back my claim is then enshrined in law you have to demonstrate if you can't euro you can redeem it for another then you can't tell me that it's equal to a euro

even if it's indexed by the amount of bitcoin you can receive is equal to one euro at any given time so so these rules are still shifting exactly what collateral you can hold but looking at how they are normal in other regular in pre-existing regulation as well typically you have to hold a third of your reserve in the basket of which you tell me that my token is equal to if your basket is a euro then it's euro if your basket is something else then it's something else and then the other 70 you can invest or read it they can be something else but you start by what is the promise that you're making to your user your customer and then and then the regulator says

well how are you going to demonstrate to me that you're able to fulfill that promise in any given time and that's just kind of like the basics of liquidity rules last question so i'm curious about the scope of those regulations you say it's in europe i'm curious about uh switzerland so how does it apply to susan and how it's like willing to collaborate and enforce those rules so um are my current understanding and the rules of shifting and all that is that so long as you're providing services and when i say providing services say

i'm a european union citizen and i come on to your own to your exchange or i'm a european union citizen and you've offered me tokens then you're in scope for this regulation and you can be in switzerland or you can be um you know on the cayman islands doesn't really matter um i think there is a different thing about um you know how to swiss are adopting their own their laws and and how consistent the frameworks may be in the future implementing a regulation that says if

you offer a cert or provider service to a european citizen implies that you know who they what citizenship they hold what if you'd never ask don't know so so if you sell something to someone you have to know who that someone is that's the starting point so if you you're the provider or the issuer and uh and i'm your customer you have to know who i am well you don't necessarily have to know their legal name and residence you do you do so this is the this is the part of the yeah but you're buying milk uh you're

not buying money like there's so so there's there's a difference there's a different level of how much i need to know about you depends on what i'm selling to you so for example for example if i'm renting your car you know i need to know that you're over 21 and you can drive if i'm buying you milk i don't need to do that if i am selling you an investment product i need to know who you are so this yeah yeah but i mean it's um so um i i'd like i'm not going to argue the

consistency of the rules but in this case um this is this goes into anti-money laundering territory so in brussels like for example one of the debates is um if i buy a prepaid cash card should you know who i am should you not know who i am and because of the terrorist attacks that we had this this was the conversation then because you can trace a lot of the payments that were done on prepaid cash cards that were sold to people without asking who they are and then they got used for you know financing terrorist activities and that's why we had the conversation of now checking who you're sending cash cards to um cryptocurrencies is very similar and we're just about entering the com the discussions on aml like i said the proposals

came on tuesday this week and already the narrative is exceptionally conscious because everything that policy makers read is is how many ransom attacks happen this week how many um you know how easy is to to get access to um you know illicit goods using crypto and i'm not saying this is the argument because it's also very it's also far easier to try to track crypto identities for example to track cash but it's just a matter of which one of those two arguments are put forward more effectively okay i think that's a wrap you