With the news in late June 2022 that the European Parliament and Council had reached agreement on the draft Markets in Crypto-Assets (MiCA) Regulation, pan-EU regulation of crypto-assets, crypto service providers and crypto markets came one step closer.

The EU legislators argue that MiCA will protect investors and maintain financial stability and at the same time foster digital innovation. It is difficult to see how these diverse goals can be pursued simultaneously and equally within a single regulatory regime. This is especially the case where, as in Ireland, the public body that will apply the regime, the Central Bank of Ireland (CBI) is not legally required to foster innovation and competition as part of its objectives.

It is more realistic to regard MiCA as reflecting political and regulatory consensus on the importance of preserving central bank control of the money supply, as well as the dominance of financial regulatory technocrats in the associated law-making process. If the EU is serious about developing digital finance, the roll-out of MiCA must give a strong voice to innovators and disruptors and give prominence to the wider public benefits of entrepreneurship.

Legal tender?

Whether a crypto asset can be considered “money” ultimately depends on its functionality. Applying a traditional monetary law test, when a crypto asset becomes widely accepted as a means of payment, it becomes “money” even if it does not have the status of legal tender. This prospect has been terrifying for central bankers worldwide. If a crypto asset is “money”, central bank money supply management through traditional tools, like interest rate setting, could become marginalised or even redundant. This is due to the fact that the decentralised nature of Blockchain DLT means that there is no central authority that can impose conditions on the use of crypto assets or limit their creation.

Hostility towards crypto

The existential threat posed by crypto assets to central bank control of monetary policy may explain the hostile attitude of many global central banks, regulators, and the mainstream financial press to the sector. The CBI, in its response to the EU Commission’s consultation on MiCA in 2020, stated:

“Among [our] key concerns is that the issuing of currency should firmly remain under the remit of the relevant public authorities (i.e. central bank). Where the reach or other features of ‘so called stablecoin’ risk it being perceived as a currency, or operating as a quasi-currency, then it should be prohibited” [emphasis added].

The CBI gives no real justification of this position or critical analysis of it. It simply assumes that central bank control of money is a public good and that initiatives that undermine it are self-evidently bad.

Bad apples

Unsurprisingly, given the vested interests lined up against them, the tone of public debate around crypto assets is often negative. The March 2022 Netflix documentary “Trust No One: The Hunt for the Crypto King” and the media reports that accompanied its release is a case in point. The documentary followed the rise and fall of Gerry Cotton, the co-founder of now defunct Canadian cryptocurrency exchange, QuadrigaCX. Its demise was triggered by the 2018 Bitcoin crash and by Cotton’s death shortly thereafter. No sensible commentator denies that there are bad apples in the crypto asset barrel, and that they should be prosecuted with the full rigour of the law. However, does every scandal need to be gleefully seized on to forecast the end of crypto and to call for legislation to regulate it out of existence?

FinTechs at a disadvantage

In March 2022, the CBI issued yet another warning to retail customers on the risks of investing in crypto assets, in which it emphasised that crypto assets are “highly risky and speculative”. Since any literate person already knows this, it is difficult to see what public interest these repeated regulatory pronouncements serve. They also create a climate in which the prevailing regulatory attitude to crypto assets and markets is unsupportive. Anyone active in FinTech knows the challenges that even large established technology firms have in meeting the expectations of financial services regulators. Regulated financial firms are expected to be staffed according to the regulator’s perception of their resourcing needs. The regulator expects them to be governed and managed by rigidly defined protocols and practices, all of which are documented and available for regulatory inspection. The focus on substance, governance and conduct drives a culture of consensus and of decision-taking by committee, with limited scope for risk-taking, experimentation and innovation.

This culture may be acceptable, or even necessary, in retail banking. After all, following the Great Financial Crisis of 2008-2010, many politicians and regulators argued, with some force, that banks should in future be treated and managed like public utilities. But a culture of safety, predictability and consensus is not natural to the tech industry. It is hard to see how any regulatory regime that is modelled on the general approach taken by the EU financial services directives as we know them today can “foster innovation” in the quick fire, first-to-market, atmosphere of global tech.

Conclusion

No product or service can expect to remain entirely immune from legislative and regulatory intervention. Regulation is necessary to curb market dysfunctionality and avoid negative outcomes. However, regulation also has the potential to cause unintended side effects, creating unnecessary barriers for new entrants, lessening competition, and reducing innovation and risk-taking.

The text of MiCA is largely fixed and, barring a political earthquake in Brussels, we will not see significant changes to the overall legislative scheme. The practicalities of implementation, however, will be decided at national level. The CBI should involve Irish and international innovators and disruptors from the FinTech community in its MiCA implementation project. The Department of Finance and its political masters should ensure that this involvement is meaningful.

For more information, contact a member of our Fintech team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.