Cryptocurrencies and the specter of gold-plating

By Lionel Lafontaine, senior manager of Square Management

Cryptocurrencies are the subject of many fantasies and distrusts, in particular because they are little known and mastered by few players. However, current practices and fraud require the establishment of fair rules, which make it possible to distribute the cards of a healthy business and to calm the debates around these tools. The MiCA (Markets in Crypto-Assets) regulation carries this ambition and should allow to exploit the potential of the innovations underpinning crypto-assets. But between managing risk and supporting new market development, the regulator is evolving on a crest line.

On the one hand, the lack of knowledge and asymmetry of information about cryptocurrencies amplify speculation and volatility. Even the most iconic and consistent projects in the cryptocurrency universe are exposed to intense speculation. The sharp devaluation of Bitcoin and the collapse of the cryptocurrency Luna illustrate this. On the other hand, gross fraud or scams also abound, as this market is poorly regulated and uncoordinated. For example, the YouTube channel Crypto Gouv, whose creator Youtubeur offered advice but also fund management to individuals, vanished with the capital invested in cryptocurrencies. The very strong challenge is to position a more solid regulatory framework and no longer be a mere spectator of its anarchic development. You must be able to position yourself in terms of product information requirements, customer profile and risk appetite, in order to inspire trust and support the growth of a reliable market. However, in light of the risks observed, it is necessary to keep in mind the wealth of innovations that accompany these tools.

Cryptocurrencies have different facets and are used in particular to raise funds for innovative projects via ICO (Initial Coin Offering) or STO (Security Token Offering). State cryptocurrency initiatives are emerging. And the desire to accelerate the democratization of digital currencies in everyday payments is increasingly present. For example, Amazon is thinking of creating a cryptocurrency supported by its own blockchain, Google is working to offer its payment service in cryptocurrency… In short, these tools have undeniable potential and are booming. A regulatory framework will make it possible to give more visibility and consistency to their use and to realize a little more of this potential.

Let’s go back to the regulatory context

The monitoring of cryptocurrencies was initiated in French law through the PACTE law (Plan d’Action pour la Croissance et la Transformation des Entreprises). This allows you to regulate the communication and recognition of these assets. That is to stop ignoring them by giving definitions and a framework.
The PACTE law provides a precise definition of the means of transaction, i.e. what a token is. It has allowed the establishment of a visa for the circulation of these tokens with a granting and withdrawal procedure, which requires compliance with European anti-money laundering and KYC regulations (knowing the customer and respecting their risk appetite).

Finally, he specifies the supervision of service providers operating in the territory and involved in the circulation or conservation of such goods, we are talking about PSAN: service providers on digital goods. These activities are also subject to MFA approval.

Recently, the MiCA law, a first draft of which was published this summer, essentially offers the same scope of development as the PACTE law and aims to refer various aspects of cryptocurrency activity to the appropriate regulations; PSD2 for payment services; DME2 for e-money. As for LCB-FT, the TFR regulation is mandated to integrate cryptocurrencies into the existing regulatory spectrum.

Furthermore, this law introduces two critical points, one dedicated to the climate impact, the second dedicated to the security of stablecoins and monetary sovereignty.

As regards the climate component, it imposes the obligation to declare the environmental and climate footprint within two years. The European Commission will have to provide a report describing the environmental impact of crypto-assets and the introduction of mandatory minimum sustainability standards. This implies an effective implementation of the text in 2024.

Furthermore, given the recent events surrounding stablecoins, special attention is paid to them in the context of this regulation. In particular, strict solvency requirements with one-to-one liquidity reserves, in order to be redeemable at any time and free of charge by the issuer. Finally, the development of stablecoins indexed to non-European currencies will be limited to preserve our monetary sovereignty.

The MiCA regulation wants to impose a daily trading limit for stablecoins. But this ceiling seems to be totally unrelated to the reality of the market. The regulation wants to impose a daily limit of 200 million euros exchanged for 1 million transactions. For example, Tether’s transaction volume is 250 times this limit (almost $50 billion traded in the last few days of August).

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By limiting the volume of stablecoins not issued in European currencies, the framework proposed by MiCA substantially restricts competition. The “European market” would therefore become a second-tier market, reducing its attractiveness with too limited a framework of transactions.

The hope for a new version of this regulation has already been expressed by Christine Lagarde, President of the ECB, in order to fill some “gaps”, in particular the need to regulate cryptocurrencies tradable without intermediaries (such as bitcoin) or cryptocurrency lending .

In addition, stablecoins have high hopes for the creation of state-owned cryptocurrencies. Because the same technologies combined with public profile storage media, and a centralized issuance logic, would allow a completely traceable and transparent digital currency to be put into circulation. Drastically limit the possibilities of fraud. All this to achieve the antithesis of the “DeFi” spirit of cryptocurrencies, anonymous and with decentralized management, independent of any political action.

MiCA is an early version of the regulatory framework. It sets major milestones and satisfies a critical set of essential requirements.

Recent instabilities on these assets have certainly led to an overreaction at the time of writing. It will have to be adapted to get an effective release and see the emergence of a safe and competitive market. Otherwise, investors with an appetite for cryptocurrencies will be taking risks elsewhere (Malta, US, Canada, etc.) and this regulation would miss its target.

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