EU Finalizes Landmark Crypto Bills
This week, the EU came to final agreement on its “Transfer of Funds Regulation” (TFR) and Markets in Crypto Assets (MiCA) proposal, which together represent perhaps the most comprehensive regulatory response to crypto to date. The final text of the regulations have not been released.
The TFR package seeks implement an anti-money laundering regulatory regime for digital asset transactions. The original proposal’s scope was limited to “crypto-asset service providers,” or CASPs; however, in March, a group of 90 EU policymakers proposed a significant expansion of the scope to include peer-to-peer transactions.
Late on Wednesday afternoon, an EU lawmaker confirmed that the Commission has reached a “provisional political agreement” on the “Transfer of Funds Regulation” that “strikes the right balance in mitigating risks for fighting money laundering in the crypto sector without preventing innovation and overburdening businesses.” It appears the final version will require the “verification” of self-hosted wallet transactions made to a wallet of an intermediary’s customer when the amount exceeds 1,000 euros ($1052). The devil will be in the (yet-to-be-finalized) details, but in essence, if you withdrew ≥1,000 EUR worth of digital assets from an exchange account to your own wallet, the exchange would be responsible for verifying that you control that wallet.
The “MiCA 1.0” package is intended to regulate centralized actors in the cryptocurrency ecosystem. The EU will now turn to developing “MiCA 2.0,” which will focus on DeFi, starting with a study conducted by the EU Commission that looks like it’ll be released in 2023.
What does this mean?
There’s a lot of unknowns right now because the final texts haven’t been released, and the details will be determinative. For example, with respect to TFR, there’s major practical differences between a customer attesting to ownership of a wallet and a crypto intermediary being responsible for verifying a customer’s ownership of a wallet.
More to come next week, but here are some threads with “initial takes” on what’s happening:
US Deputy Treasury Secretary Adeyemo on the State of Digital Asset Regulation
At Consensus 2022, a US Deputy Treasury Secretary Adewale Adeyemo delivered a speech on the current state of digital asset regulation. The speech and discussion that followed were centered around the fundamental question facing policymakers: how to allow for innovation while achieving their policy objectives?
Adeyemo’s message to the digital asset industry emphasized the importance of responsible innovation. He said, “How do we think about these things [financial stability, investor protection, and national security] in a way that allows us to prompt what I would call responsible innovation, and gives those people who are in this space the ability to innovate, within a sense of this regulatory architecture that will govern here in the United States?”
His speech emphasized the importance of “making sure that we give you the room to innovate within a regulatory architecture that allows us to protect our national security, consumers, investors, and financial stability.”
He also touched on the privacy issues surrounding unhosted wallets and KYC/AML disclosure requirements, a topic that has remained unresolved since former Treasury Secretary Steven Mnuchin’s “midnight rulemaking.” On the topic, Adeyemo stated that “[he] understand[s] and respect[s] the need for and desire for privacy, but [that] we need to make sure that we’re also in a place where we’re not creating avenues where those who want to move funds illicitly are able to use digital assets more than traditional assets.”
Adeyemo concluded the discussion by lauding the digital asset industry’s interest in promoting ideas like financial inclusion. He suggested that any innovation that helps to extend access to banking and financial services to the underserved is something to explore.
What does this mean?
Since the Biden Administration released its Executive Order on Digital Assets, agencies seem more open-minded with respect to digital asset innovation and more interested in constructing appropriately nuanced regulatory proposals to foster this innovation. We are seeing more and more regulators like Adeyemo acknowledge the benefits that permissionless financial infrastructure offers.
Adeyamo’s comments on “unhosted” wallets rang a bit of an alarm bell. They could be construed to lend support to reinvigorating Mnuchin’s midnight rulemaking, we are not too worried about it at the moment. We’ll be tracking this closely, though, since self-custody is really the foundational innovation of crypto.
House Agriculture Committee Hearing on Digital Asset Regulation
Last week, the House Agriculture Committee held a hearing generally focused on digital asset spot market regulation. The witnesses included Cardano founder Charles Hoskinson and Georgetown Law Center Professor Chris Brummer.
Both emphasized in their opening remarks that the future of digital asset regulation will require much more than just defining agency jurisdiction and placing digital assets into various governmental organizational charts.
Instead, Brummer suggested that the implementation of an effective regulatory framework will require revisiting “longstanding assumptions about market infrastructures embedded in securities and derivatives law and adapting the regulatory system in creative ways that reflect the best of our experience and collective values.”
Professor Brummer highlighted that deeming a digital asset a “commodity” or a “security” will not “magically passport digital assets to regimes readily built to provide proper or even efficient oversight or clarity.” Elaborating on this, he explained that categorization as a commodity would likely be under-inclusive as this regime does not require any disclosures, and categorization as a security would simultaneously be under and over-inclusive failing in some instances to account for critical aspects of the digital asset ecosystem and imposing obligations with little to no relevance in others.
Rather than trying to shoehorn these “financial stem cells” (as Hoskinson referred to them throughout the hearing) into traditional categorization structures, Hoskinson encouraged policymakers to return to first principles and ask the question “what public policy considerations are [we] attempting to satisfy?” He suggested that moving forward “the most effective thing that can be done… is to have a really good notion of what decentralization is and what are the factors that produce [it].”
What does this mean?
We hope both the witnesses’ articulations of the fundamental disconnect between the functionality of the digital asset ecosystem and the assumptions built into the current regulatory framework governing financial activity will influence Washington’s approach going forward. Novel innovations typically demand novel regulatory responses. We need to have the humility to admit that and work towards crafting a framework that focuses on the ecosystem’s unique characteristics and risks, as both of the witnesses suggested in the hearing.