The Last Look…

It’s not what you said, it’s how you said it…

Sometimes what a regulator says and what they actually encourage are different things. In the case of digital assets and traditional financial regulators in Western economies this has been particularly pronounced: think of Operation Chokepoint 2.0, the name for the supposed project from US regulators and lawmakers to prevent the growth of the crypto economy by preventing access to the banking world.

As the US ploughs a new path under the current administration, its enthusiasm is fuelling a rush of company launches, IPOs (Circle) and deals (Coinbase buying Deribit or Stripe snapping up Bridge, both billions of dollars-worth of acquisitions). Considering that crypto enthusiasts have been blaming the lack of clear regulation as the key hold up to progress for years, it’s somewhat ironic that jurisdictions where the rules are clear are being left behind by one where they’ve yet to become defined, with just the intention to be friendly in the future fuelling the hype.

Take the European Union where ESMA published an update at the end of June about its DLT Pilot Scheme, recommending that it be made permanent, with some tweaks, to encourage take up, while noting that so far, only three companies in the whole of the region have secured a greenlight under the scheme. The regulator launched the Pilot in March 2023, just three months before MiCA was formally adopted.

EU regulators have admittedly moved fast to put into place a framework for digital assets: they’re ahead of every jurisdiction except for the UAE and Japan, two jurisdictions that have had completely different reasons for going fast. In Japan, the painful experience of Mt Gox hit early and forced lawmakers to act, but despite advanced rulemaking, the extent of activity in the country remains well shy of other jurisdictions that have less developed regulatory parameters.

Dubai, meanwhile, has gone all-in on blockchain technology, setting up the world’s youngest and sole dedicated regulator for digital assets, VARA, building out not just a supervisor with hundreds of staff but also a full set of rules that makes it easy for startups and other companies in the space to navigate. But there is one crucial difference: Dubai’s regulatory push wasn’t about creating a playpen for digital asset proponents in the hope they eventually get bored and give up. VARA’s CEO, Deepa Raja Carbon, told me earlier this year that they don’t want to be the “grown up” in rooms when companies come to them to bounce ideas around, instead, the regulator is trying to help these start-ups to come up with ways that make it possible for them to do business.

Imagine going into some of the Western regulators to shoot the breeze about cool things they could do together using blockchain technology – it’s not a picture that comes naturally to mind. In Europe, one crypto executive described policies as following a classic pattern: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.

While EU regulators were fast to move, there is widespread discontent with the rules, simply because they just don’t fit. Therefore, it’s not a coincidence that the idea of MiCA II is already floating around, six months before the implementation period for version 1 runs out. For MiCA was always about containing something, rather than encouraging it. One requirement, related to stablecoin reserves, is that the majority of reserve holdings should be kept in European banks, something that can be described as potentially problematic.

For an emerging asset class that initially offered an alternative to problems created by the banking system to be tied very specifically to dealers in a region seems circular, to say the least. Some of you may also be old enough to remember the European banking crisis and the unpleasant fall out that lasted for years.

Technology can rarely be boxed in, especially when it’s working on a global level, and by working to restrict it rather than genuinely exploring it, no amount of legal codification will clear the air of disapproval coming from supervisors

Circle, the issuer of the USDC stablecoin, is only too familiar with these issues. When Silicon Valley Bank collapsed, the stablecoin reserves the company held at SVB looked unsavable for a while, causing the stablecoin to temporarily de-peg. While SVB no longer exists, Circle’s late June IPO has opened the door to blockbuster demand, indicating huge investor appetite for exposure to digital assets.

Back to ESMA and its update, the three names that are participating in the DLT Pilot Scheme are completely respectable, but a far cry from the rollcall of blue-chip banks and global financial powerhouses that are working with rulemakers in Singapore on projects such as Guardian. While ESMA is considering what to do with its sandbox, the Monetary Authority of Singapore is already working on laying the groundwork for commercialising DLT projects, such as tokenisation of money market funds and other very real areas of financial markets.

In the US, it’s not even clear who is in charge of regulating digital assets. The steady passing of the stablecoin bill and talk of a market structure bill in the shape of the Clarity Act has been enough to unleash Wall Street. There are still no rules, but by removing implicit tone of disapproval and explicitly aiming for a leading role in digital assets on a global stage, banks are rushing to see what they can do with the technology. (Check out The Full FX’s webinar about the intersection of crypto and FX and tell me that digital assets are just a hype).

Perhaps, if the EU actually wanted to grow its digital asset economy, it might consider a similar change in tone, not just explicitly. Technology can rarely be boxed in, especially when it’s working on a global level, and by working to restrict it rather than genuinely exploring it, no amount of legal codification will clear the air of disapproval coming from supervisors. Until then, not much will change and at the current speed that the US is dictating, it might be too late anyway.

Ps: the UK is so far behind in all this that it no longer really features in the race. Until then, we hardly need to bother.

eszalay@thefullfx.com