“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”
Plato, "Phaedrus" (dialogue)
Phaedrus, one of Plato's dialogues, is ostensibly about love, but revolves in fact about rethoric, the art of persuasion.
The MiCA Regulation, voted in the European Parliament on April 20th, 2023, and soon-to-come-into-force tries to persuade everybody that it has been crafted as part of a drive to "make Europe fit for the digital age and to build a future-ready economy that works for the people."
Panathenaic Amphora, 500-480 BCE; with detail from Academy of Plato, 1st century BCE - source
Patrick ("Paddy") Hansen, a German who has long tweeted about crypto policy in Europe and now works as a Director, EU strategy & policy at Circle, has recently posted a comprehensive review of the MiCA Regulation. Was he persuaded?
Paddy's review is very detailed and, having read the Regulation myself I can testify, accurate. It aims to stay balanced (one might say "politically correct") and not offer interpretations which may be considered subjective. However, he slips in a few interesting innuendos which deserve careful reading.
Because Circle, his employer, is a "policy taker", I wanted to analyse his review with the eye of a "policy maker". In other words, how could an US or Asian legislator read MiCA and what could they take from it that would serve their constituencies?
MiCA's genesis
The first chapter, dedicated to how the EU decided to start working on a crypto regulation, has an interesting title: "Why did the EU decide to front run the world?" The choice of words might or might not be relevant here, as Paddy is not an English native speaker (neither am I). Still, "front running" does bear a negative connotation.
Paddy highlights four reasons which are worth comparing with the "Explanatory memorandum" put forward by the European legislator.
The "Explanatory memorandum", with which each new EU regulation starts, explains that, among other things, the existing European financial watchdogs, ESMA (European Securities and Markets Authority, a kind of "SEC of the EU") and EBA (European Banking Authority, perhaps to be compared with the US Office of the Comptroller of the Currency, OCC), have argued in 2019 that:
- while some crypto-assets could fall withing the scope of (existing) EU legislation, effectively applying it to these assets was not straightforward.
- some provisions in existing EU legislation may inhibit the use of DLT.
- however, most crypto-assets fall outside the scope of EU financial services legislation and therefore are not subject to provisions on consumer and investor protection and market integrity.
Reflecting on the first and second points point above, one could argue that the most reasonable response would be to adapt the "regulatory technical standards" and "implementing regulations" of existing laws, rather than creating a whole new law. Yet "consumer and investor protection" is a stronger argument, and this is seen as the central point for Paddy.
Consumer protection and money laundering risks
MiCA lists 4 objectives (more on these later), only the third of which is "consumer protection and market integrity", ranking lower in importance to "legal certainty" and "supporting innovation". Moreover, the very first paragraph tries to explain that MiCA is part of
"a package of measures to further enable and support the potential of digital finance in terms of innovation and competition"
which to any American must sound like an oxymoron.
Indeed, one needs look no further than the minutes of a hearing in front of the Joint Economic Committee (JEC) of the United States Congress (the American legislator) from May 22, 2018, titled "Breaking through the regulatory barrier: what red tape means for the innovation economy". In its "opening statement", the equivalent of an "explanatory memorandum", one can read
"America's tradition of invention has been at the heart of our economic strength. As lawmakers, we must recognize that the only way forward is to place our trust in the American people and to get out of the way."
Thus the legislator of the United States, home of 8 of the 10 largest tech firms in the world (the other two being South Korean and Chinese, respectively) spells out from the get-go what it believes is not "the best way", but really "the only way forward."
Further in the same document, Dr. Joseph Kennedy testifying in front of the JEC, lays out several principles for establishing sound regulations, of which I list here the first three:
- Embrace innovation
- Embrace transparency
- Place more trust in the consumer - given sufficient information, consumers can be their own most effective advocates.
Another witness, Christopher Koopman recalls how the internet revolution has started as "a platform with little prior restraint on the commercial activities undertaken [...]. When harms and failures did occur, we addressed them in an ex-post manner."
He proceeds to state that "to ensure that [the US] remains a leader in the innovation economy [...] we must balance important regulatory goals - safety and consumer protection - with a tolerance for mistakes, failures, and learning so that innovation can continue to move us forward."
I know of no global discussion forum where legislators openly analyse and compare the merits of different approaches toward technological innovation, and comparative analyses done by even the most learned political scientists and academics can be easily brushed aside.
But the facts are more difficult to ignore, and they are stubborn: Europe has not managed to create a single global tech firm in the past 5 decades, as its biggest, SAP, has been founded in 1972 and ranks 11th.
Paddy is not American, yet he clearly isn't persuaded by MiCAs pretense. If a legislator wants to "support innovation", he doesn't propose "a package of measures"; he rather "trusts the people and gets out of the way".
Prevent regulatory arbitrage
The second reason highlighted by Paddy speaks of the "calls for regulatory harmonization from "the industry", regulators, and policymakers. It's worth asking "what industry exactly?", especially when the rest of the phrase reads
in part to prevent regulatory arbitrage.
So yes, one can see why the regulators and especially policymakers might not necessarily be thrilled about regulatory arbitrage. But if you think about the crypto industry - in as much as there is one in Europe (there isn't really)-, why would it be unhappy about ... regulatory arbitrage?
Regulatory arbitrage is to an industry what competition is for consumers: a good they benefit from. Competition reduces the prices for consumers and increases their well-being, as recognized by the EU founding treaties themselves. Yet it comes at the expense of the weakest firms and industries which must change and adapt, or disapear, as the "horse carriage" industry did when Daimler and Benz ushered the Old Continent in the era of the automobile.
There was an era when Europe was a leader in innovation, not in regulation ...
The same way as competition reduces prices for consumers, regulatory arbitrage reduces regulatory hurdles for businesses.
So one must conclude that "the industry" which wanted to "prevent regulatory arbitrage" by the nascent crypto industry was ... some other industry which felt threatened ... I guess nobody needs a picture as to what that "industry" might be, at this point.
Libra and Diem
MiCA is several hundred pages long. I read it all once and I haven't seen either Libra nor Diem mentioned or even alluded to in a transparent manner. As a matter of fact, I read the thick MiCA chapter dedicated to ART (asset-referenced tokens) and tried, with my knowledge of crypto, to understand what it was referring to, to picture even one ART that might have served as "poster child". I came out empty.
I can name no existing crypto-asset of any significance which would today qualify as an ART. Yet MiCA dedicates a few hundreds of pages to regulating ARTs ... an inexistent species!
Now, thanks to Paddy I understand why! The EU legislator felt compelled to arm itself with legal tools in order to thwart Facebook (now Meta) in its attempt to issue a private currency.
Global leadership in ... regulation
Europe has long appeared utterly incapable of incubating a global tech leader, and the way it operates is probably among the reasons. Then someone came up with this idea: perhaps instead of changing the way Europe operates, it would be easier to change the goal so as to allow Europe to continue operating as it has always done. Instead of competing to become a global leader in tech, Europe could instead become the global leader in ... regulation!
“Everything must change for everything to remain the same”
Giuseppe Tomasso di Lampedusa - Il Gattopardo
The only trouble is that the Founding Treaties clearly set higher level goals: peace and the well-being of the people. The same founding treaties recognize that economic strength and prosperity is an important component of "well-being".
How is being a global leader in regulation going to help achieve the well-being of the Europeans is thus not clear, especially since, if we are to believe the American legislators (see above), doing the exact opposite of what they do is unlikely to lead to "economic strength".
At this point, it's worth coming back to the "principles" laid out by Dr. J. Kennedy in his testimony in front of the JEC of the US Congress. The fifth reads:
...every major rule should undergo some level of public cost-benefit analysis in which the agency clearly explains why and how a rule will increase social welfare. To the extent possible, this analysis should be backed by quantitative studies.
Going on the offensive
The three previous reasons - protect consumers, prevent regulatory arbitrage, control a big for-profit business wanting to introduce its private money - are all defensive: Europe was acting in response to events it wanted to have control over, or, the Japanese Go players would say, Europe was gote.
MiCA is Europe's gote answer in a symbolic game of Go against the crypto revolution - source
With the fourth reason, Europe makes a sente move. Yes, MiCA is undoubtely another success in the unstoppable march of Europe toward the pinnacle of regulation. Except ... is that a goal worth pursuing?
MiCA's goals
It is again extremely instructive to compare the goals explicitly stated in the legal text with the goals as identified by Paddy's analysis.
The EU legislator ranks "legal certainty" as the first objective of MiCA. It is worth restating that, upstream of this effort, the new EU "Strategy on digital finance" aims "to ensure that the EU embraces the digital revolution and drives it with innovative European firms in the lead" and also that "the EU financial services regulatory framework is innovation-friendly and does not pose obstacles to the application of new technologies."
Yet, as I argued at length in many past articles, blockchain and crypto innovation do not need "legal certainty". In fact, they don't need the law, they are indiferent to the law. This is quite probably the biggest contribution of blockchain technology to human progress. As I wrote in "Reinvent blockchain", blockchains and cryptos have:
shown that random, anonymous humans can be brought together to co-operate not only by a legal framework, which institutionalises the fear of not complying (and triggers reflexes of avoidance), but also by the power of economic incentives.
Paddy doesn't seem to buy what the EU legislator is selling. He mentions "legal certainty" only as the third objective, under which he also uses, as very last, the word "innovation".
Yet the EU legislator claims that "support innovation" is an objective second only to "legal certainty" ... Of course the American legislators are laughing their jackets off reading such a claim.
Remember, the credo of the US law makers is that:
"America's tradition of invention has been at the heart of our economic strength. As lawmakers, we must recognize that the only way forward is to place our trust in the American people and to get out of the way."
... rather than create a package of measures that "support innovation"... Paddy is clearly not amused, as he ignores the pretense of "supporting innovation", but he does use another wording in the "fourth objective" (according to his ranking): "ambition to affect technological and economic innovation".
Again, the choice of the word "affect" might or might not be relevant, but just for fun, while the first definition of "affect" is neutral, here are the 4 other definitions the Oxford Dictionary offers for "affect"
- affect somebody/something (of a disease) to attack somebody or a part of the body; to make somebody become ill
The disease is more likely to affect women than men. - affect somebody [often passive] to make somebody feel very sad, sorry, etc. about somebody/something
They were deeply affected by the news of her death. - (formal) to pretend to be feeling or thinking something
- affect something (formal, disapproving) to use or wear something that is intended to impress other people.
The third objective of MiCA, according to the legislator is "appropriate levels of consumer and investor protection and market integrity" and this is the objective which Paddy ranks first.
The fourth official objective is "ensuring financial stability" which sounds to any levelheaded reader as a vastly overblown concern. When regulations cannot prevent big banks from collapsing, regulators are concerned about the risks to financial stability coming from an almost non-existent industry and think that issuing a regulation will impact this largely non-existent issue?
Paddy politely ignores this pretense which can be seen as either comical or insulting to the intelligence of the readers, depending on the mood of the latter. To him, the real fourth objective of MiCA is ...
"Taking the leading role on how to regulate crypto globally, doubling down on its ambition to affect technological and economic innovation through early and comprehensive policy frameworks."
In other words, pursuing an arguably misguided goal and quashing innovation in the process ... quite different from what the policy would like to seem to be aiming for.
But, as Phaederus said more than two millenia ago,
“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”
Read the follow-up of this commentary here:
