How the EU is taking the lead in cryptocurrency regulation

Jude Ayua

Yves Mersch, Executive Board Member, European Central Bank (ECB), hints at the London Blockchain Conference about new legislation coming soon! Mersh looks at key considerations, challenges, and goals for cryptocurrency regulation.

Yves Mersch, Executive Board Member, ECB, delivered the keynote address on Day Two of the London Blockchain Conference, 31 May 2023. In his address, Mersch discussed the current and pending regulations in the European Union (EU), the United Kingdom, and the implications of these for blockchain, cryptocurrency, and Web3 adoption.

Key elements in cryptocurrency regulation

Mersch opened the discourse by educating the diverse audience at the conference on how the government should go about regulation in the cryptocurrency industry. He noted that there are three elements to consider in the regulation of cryptocurrency:

First, is regulation coming in too early? And will it stifle innovation?

Mersch explained that regulators should be careful about the time they introduce regulation to an emerging industry, such as cryptocurrency. If a regulation comes at the wrong time—too early or too late—it may have negative implications. Regulators should therefore take time to study and understand the market before they can efficiently regulate it.

Second, is it intrusive? And is it needed at all?

Here, Mersch explained that regulators should critically assess if there is a need or not for the legislation or other regulatory measures they are proposing. This aligns with the first point above: regulation should not stifle innovation, it should encourage and advance it. This suggests that regulators should not introduce legislation for the sake of it, but when necessary. Perhaps, regulation is needed at all times. It therefore, depends on the scope of a certain regulation and the context that it applies to.

Third, the distribution of responsibility: What is the role of the public and private sector?

It is important that a legislation should spell out the specific roles of the stakeholders it applies to, Mersch pointed out. Otherwise, it would lack clarity and the capacity for its implementation. The public and private sector each have a key role in the regulation of the industry, and both should play their parts accordingly.

Mersch followed with an assessment of these elements with two key questions:

Where are we now in the industry?
What is the goal of the regulation?

Read also: What is cryptocurrency?

Challenges in cryptocurrency regulation

In response to the first question, Where are we now in the industry?, Mersch stated that the cryptocurrency—and technology in general—is still faced with several challenges which regulators should take into account. He identified “risks,” unaccountability, and insufficient information as some of these challenges.

Risks

Mersch noted, “[it] is not technology that manages risk, it is the people who use technology… The risks in the crypto assets are similar to the ones in the traditional banking system.” He explained further that there are risks in innovation as there are also benefits. “To understand this, we need to get the proper information,” he suggested, adding that “Regulators usually start with what they know.” Perhaps, it would be best to suggest that regulators should start with what they know. Mersch also noted that “[t]here is a deliberate manipulation and hike of prices in the crypto assets world by certain builders,” which could increase the level of risk for investors because of the volatility of the market.

Unaccountability

This challenge is peculiar to “those operating in unregistered regions,” according to Mersch. An example is stablecoins owners who only disclose their assets on a voluntary basis, and some of them are not audited. This unaccountability sometimes covers up some of the problems with stablecoins, for example, instability—ironically, and nonfinancial backing. When there is not enough financial backing for stablecoins, they become unreliable. This is what differentiates them from fiat. As Mersch noted, “Liquidity depends on access to funds in the national bank reserves, but crypto assets depend on banks.”

Information

Mersch asked an important question: Where do we stand today on statistics? Relating this to the first challenge above, he said, “[t]here is still not a very high size in the Euro market, so risks can still easily be managed.” He then advised that “[t]here is a need for organized information gathering.”

Goals for regulation

He identified some of the goals of regulation as follows:

Ensuring security, healthy competition, and harmonization.
Supporting innovation.
Ensuring financial stability.

Mersch noted that “Innovation needs proportionate regulation. Innovation is not a means in itself, but must lead to benefits.”

He concluded that the EU applies the elements he explained above in cryptocurrency regulation in the region. He cited some of the regulations that the EU Commission has passed and those underway. This suggests why the EU is leading in terms of cryptocurrency regulation and other areas of technology, such as cybersecurity, data privacy and protection. The GDPR is a good example.

Upcoming regulations in the EU and the UK

Mersch also hinted to the audience about pending legislation in the EU (Markets in Crypto Assets—MiCA) and the UK (Financial Services & Markets Bill and central bank digital currency, the digital pound).

“The MiCA was recently approved but implementation is still ahead. There is an expected complementary technical legislation. Another legislation that is underway is coming in weeks … one that will focus on assessing risks in the crypto assets market, looking at tokenized assets,” said Mersch.

The Financial Services & Markets Bill—a Bill to provide for the regulation of financial services and markets; and for connected purposes—is awaiting 3rd reading in the House of Lords on 19 June 2023. Although the Bank of England said that it does not have plans to introduce a CBDC, it argued that it is essential to have plans in place. The Bank, in February 2023, together with the Treasury, launched a consultation on its assessment of the potential for a digital pound and its design ideas.