Securities and Exchange Commission Chair Gary Gensler has been making false claims that there has been clarity in cryptocurrency regulations in the United States for years. In contrast, the European Union has taken concrete action by passing the Markets in Crypto-Assets (MiCA) regulatory framework in April. Although imperfect, this is a significant step in the right direction for the industry and serves as a warning to the US that it will be left behind if it does not catch up with outdated regulations.
Similar to how Bitcoin revolutionized traditional concepts in technology, economics, and finance, regulators must adapt existing regulatory and financial security frameworks to create a conducive environment for participants. While there are valuable elements in the current financial and regulatory frameworks, there are also shortcomings that fail to adequately address the issues specific to the blockchain industry. This leads to unnecessary disputes among lawyers over interpretations instead of adhering to clearly defined legislation.
Web3, with its practical applications, has tremendous potential for improving efficiency, openness, and fairness in the financial system. However, it is still a remix of the traditional system and requires a regulatory framework that aligns with its unique benefits and challenges.
MiCA is a necessary but mediocre step forward in terms of regulation. The purpose of financial and securities regulations is to prevent harm to individuals. This includes preventing terrorists from using money for terrorism and fraudsters from making false claims to investors. It also involves holding licensed individuals and entities accountable to established operating standards in financial markets.
However, the existing regulatory frameworks struggle to address the complexities of digital assets. The categorization of digital assets as commodities or securities, or even as an entirely new category, poses challenges for the current frameworks. Additionally, the slow pace of innovation surpasses the ability of traditional finance regulations to adapt. Authorities are faced with the dilemma of competing with smart contracts that can be deployed and upgraded within minutes.
It is evident that new regulations and guidelines compatible with the benefits and challenges of Web3 are necessary. MiCA is a promising attempt, although its effectiveness will depend on how it is implemented by individual member-states of the EU. The framework may face challenges in native courts, resulting in varied outcomes in different cases.
MiCA has its positive aspects. It introduces tighter rules and harsher penalties for crypto asset service providers who lose customer funds, addressing a longstanding issue in the industry. However, it falls short in preventing market manipulation, as most manipulation occurs outside the EU. Furthermore, it excludes decentralized finance and future central bank digital currencies, which is frustrating considering the significant role DeFi plays in on-chain transactions.
Unfortunately, MiCA also has concerning elements. The “Travel Rule” increases surveillance and recording of financial transactions, requiring service providers to identify both senders and recipients for every transaction. The low threshold of 1,000 euros for reporting leads to excessive surveillance of regular individuals, despite the majority of financial malfeasance being committed by larger banks and institutions. Moreover, the requirement of official approval before launching tokens or liquidity stifles innovation and creates delays.
The fragmented nature of the EU court system poses challenges in drawing meaningful conclusions from individual rulings. In contrast, the unified and solid foundation of legal rulings in the US court system makes it more likely for other countries to follow their regulatory guidelines. Until the US establishes substantial regulatory frameworks, regulators, exchange operators, and founders will proceed cautiously. While MiCA may provide some inspiration, it is not the guiding light they need.
The blockchain industry is at a critical juncture, where both regulators and users need to find common ground. Fraud and scams have caused individuals to lose their life savings, while regulators struggle to keep up with the rapid pace of innovation. It is important to develop regulations that strike a balance between protecting users and fostering innovation in the industry.