Regulation
Is Europe ready for MiCA?
Europe is currently at a turning point in cryptocurrency regulation. The European Union has approved the Markets in Crypto-Assets Regulation (MiCA), which will establish uniform rules for crypto-assets across the EU market. Some of which many believe consumers have desperately needed for some time. This is an excerpt from The future of digital banking in Europe Report 2024.
MiCA will apply from 30 December 2024 and will cover digital assets that are not currently regulated by other financial services legislation. The regulation will standardize the issuance, trading and management of cryptocurrencies and will include provisions on transparency, disclosure, authorization and supervision of transactions.
The regulation also aims to support market integrity and financial stability and, importantly, ensure that consumers are better informed about the risks associated with crypto-assets as they transition from Crypto Winter to Crypto Spring. The rules will also stipulate that cryptocurrency is easier to track, but at the same time more difficult for criminals and terrorists to use.
From Winter to Spring: Restoring Trust in Cryptocurrencies
In 2024 and beyond, humans and our increasingly intelligent machine counterparts will continue to come together to create a whole new world. Interactions between consumers and businesses are expected to reach new levels, redefining customer service and how individuals experience it.
MiCA’s goal is to safeguard cryptocurrency users and provide a safe and secure environment by imposing regulations that ensure the protection of retail investors. However, one of the most important challenges in instilling consumer confidence has been the lack of clear legal definitions and classifications.
While the new regulation addresses this issue by classifying various crypto assets into distinct categories, such as e-money tokens, asset-referenced tokens, and utility tokens, enforcement of this may not be as simple. Furthermore, while regulation can support consumer confidence in digital payment forms or banking services, what impact will MiCA have on European cryptocurrency markets once it comes into force? Is Europe prepared?
According to Amarjit Singh, EY EMEIA blockchain lead, “MiCA has the opportunity to bring certainty to the regulatory treatment of digital assets and cryptocurrencies across the EU. Companies have prepared based on the original regulatory announcement, but As a fast-moving sector, it is vital to keep the focus on things moving quickly to ensure the EU continues to develop Level 2 and Level 3 texts at the right pace.”
What Singh is referring to here are the ESMA and EBA legal instruments called Regulatory Technical Standards (RTS), Implementing Technical Standards (ITS) and Guidelines, which will support authorities and companies captured by MiCA. Before standards or guidelines are adopted, the EBA and ESMA must consult with experts and other interested parties to ensure that they are fit for purpose.
Preparation must be established at the right pace, but with price fluctuations and emerging technologies, this can be difficult to achieve. This means that further guidance needs to be released as developments occur.
Tokenization: scalable, efficient and secure?
In early 2024, the UK government has promised to pass primary legislation ensuring user privacy in the event of a future digital pound. In response to a consultation, the Treasury and the Bank of England reiterated that, although no final decision has been made, work will continue into the design phase. Concerns that emerged included access to cash, user privacy and control over their funds.
To address these concerns, the UK Treasury has confirmed that if a digital pound were to be implemented, primary legislation would be introduced to ensure privacy and control. At the time, Economic Secretary to the Treasury, Bim Afolami, said: “We are at an exciting time of innovation in money and payments, and we want to ensure the UK is ready should the decision to build a digital pound be taken into the future. future. This is the last phase of our national debate about the future of our money – and it is far from the last. We will always ensure that people’s privacy is paramount in any project, and any implementation would be parallel to, and not instead of, traditional cash.”
Deputy Governor for Financial Stability, Sarah Breeden, added: “Trust in all forms of money is an absolute necessity. We know that the decision whether or not to introduce a digital pound in the UK will be important for the future of money. It is It is essential to build this trust and have the support of the public and businesses who would benefit if they were introduced.”
Alongside this, Victoria Cleland, executive director for banking and payments at the Bank of England, explored the impact of the UK’s real-time gross settlement system on the bank’s work on a wholesale digital currency central.
“An RTGS service that is open longer, with more and different types of participants, and offers synchronization to a wider range of ledgers, could achieve many of the benefits often associated with wholesale CBDCs. It would realize our vision of an all-encompassing platform. “wholesale with more efficient and resilient wholesale payments provided by a competitive, mixed ecosystem of companies And, importantly, it would not require the creation of an entirely new payments infrastructure.”
A 24/7 nuclear settlement future
It’s clear that progress is being made to ensure tokenization is scalable, efficient and secure. Months later, in March 2024, the UK government’s Technology Working Group, chaired by Michelle Scrimgeour, published a report on the second phase of her work: Further Fund Tokenisation: Achieving Investment Fund 3.0 Through Collaboration. The report expands on the potential use cases of fund tokenization, the use of tokens as collateral for money market funds, and the role tokenized funds play in a fully “on-chain”; investment market that will streamline back-office functionality.
In this regard, Afolami said: “I am pleased to welcome today’s report from the Asset Management Taskforce’s Technology Working Group. As we work to grow the economy, the UK is ideally placed to harness the transformative capabilities of technology in this sector, combining our expertise in innovation and investment management. This report shows – once again – that the UK is on the pioneering side. For the third phase of its work, the Technology Working Group will now shift its focus to how the UK investment management sector can exploit the opportunities presented by artificial intelligence.”
Singh commented on this and said that: “The second report from the Investment Association and the UK’s HM Treasury Asset Management Taskforce sheds light on how critical it is to bring tokenisation from funds to the wider financial services ecosystem. Just as the Internet matured from Web1 to Web3, financial markets will mature, from Markets1 where we wrote trade receipts, to Markets2 where we have centralized trading, to Markets3 which is hyper-personalization, tokenization, and 24/7 atomic settlement 7.
DLT-based designs provide instant settlement by eliminating any time lag between trading and settlement, and simultaneous settlement by allowing all stages of multiple linked transactions to be settled simultaneously. Atomic liquidation is sometimes used to refer to simultaneous, instantaneous liquidation, but while simultaneous liquidation is probably always desirable, instantaneous liquidation may not be. For example, while real-time settlement can eliminate risk, instant settlement can limit the number of trades allowed and result in a greater liquidity burden, since trading and settlement are decoupled and traders can only sell securities they already own.
Where DLT comes in is that it can enable an expanded settlement environment. This is also applicable in the case of CBDC, where the technology can be used to implement a CBDC to execute and settle peer-to-peer transactions. However, even this form of transaction is not without risks.
According to Pallavi Thakur, director, innovation according to Swift, as interest in CBDCs and exploration of tokenization advances grows, there is a risk that solutions based on different technologies and regulatory standards will be developed, creating fragmentation. This could lead to the emergence of systems that are unable to effectively communicate with each other and function across digital boundaries. These are, in effect, “digital islands” that will create inefficiencies and prevent tokenized solutions from expanding and reaching their full potential.
“For these reasons, we believe that ensuring interoperability between tokenized financial solutions is the most important step in enabling widespread adoption of the technology on a global scale. Ensuring system interoperability will also be key to ensuring that tokenization benefits from robust security protocols that can protect against cyber attacks and fraud. Interoperability, by design, will also be key to ensuring that tokenization benefits from robust security protocols that can protect against cyberattacks and fraud.