One of the major impediments to greater participation in crypto assets - particularly by institutional accounts - is the current lack of regulatory certainty surrounding these assets. However, there are signs in Europe that this is changing.
In his October 8 statement at the hearing which is considered to have all but his clinched his appointment as executive vice-president of the European Commission (EC), Valdis Dombrovskis said, “We need a common approach to crypto assets such as Libra. I intend to propose new legislation on this.”
Dombrovskis, the former prime minister of Latvia, is also the EU’s finance commissioner and has been a vice president for the euro and social dialogue since 2014.
He is set to take over an expanded remit in his role as EC executive vice-president for “An economy that works for the people.” His comments about Libra and new regulation for crypto assets amount to the only real policy initiative in his 15 minute confirmation statement which appears to have been otherwise carefully calibrated to ruffle no-one’s feathers.
There seems little doubt that increasing focus is being paid to crypto assets in the EU. In her public mission statement to Dombrovskis, commissioner-elect Ursula van der Leyen said, “You should ensure a common approach with member states on cryptocurrencies to ensure we understand how to make the most of the opportunities they create and address the new risks they may pose.”
Till now, the EU has not adopted a member-wide legislative approach to crypto assets, and instead had left it to individual states to introduce regulation or not as they see fit. Inevitably, that has meant a patchwork quilt of differing approaches.
Mario Draghi, president of the European Central Bank, in a speech of March 2018, conceded that “digital currencies are not subject to a specific supervisory approach,” while warning that such currencies are “very risky assets.”
But, things are changing and what appears to have changed the game is Libra, the digital currency proposed by Facebook. Libra has spooked regulators around the world, and it looks as if the EU is particularly spooked. This, more than anything else, has spurred the move for collective action.
At the end of the first week in October, the EC sent a questionnaire to Facebook and the Libra Association asking them to clarify certain aspects of the new currency with regard to financial stability, money laundering and data privacy. These new questions “go beyond” earlier anti-trust issues it had raised with Libra at an earlier date, said an EU spokesperson.
According to reports, Dombrovskis says there is “strong willingness to act at an EU level” where Libra is concerned. There is considerable worry among member states that should one jurisdiction allow Libra to operate within its borders it would become a passport to the entire union. Moreover, given the continuing difficulty of making cross-border payments in Europe, Libra could prove alarmingly popular. So, the era of benign neglect is over, at least as far as the EU is concerned.
Regulatory authorities in Europe are doubtless concerned that crypto currencies are very hazardous to investors, but perhaps even more worried about their potential use in money laundering. According to his address on October 8, Dombrovskis views his number one objective as the fight against money-laundering. So, a number of different concerns coalesce in Libra, and, more broadly, in crypto assets as a whole.
A spokesman for Dombrovskis declined to comment on detail on the vice-president’s initiatives, but directed us to his public comments.
Libra has had a rocky road to date, and its difficulties now come not single spies but in battalions. At the beginning of October, PayPal dropped out of the project, quickly followed by other backers including Mastercard, Visa, eBay and Stripe.
So far crypto assets have posed a conundrum for regulators and lawmakers. Are they securities, currencies, commodities or even utilities? No one seems to know. In a speech of March 20 2018, Gerry Cross, director of policy and risk at the Central Bank of Ireland, neatly summarised what a knotty problem it is for those entrusted with financial regulation: “To the extent that virtual currencies, ICOs, or those involved in their issuance or trading, are not subject to existing regulation, then the question arises: has the regulation fallen behind developments and needs updating. Or is it the case that these activities are just new examples of old types of activity and there is no need for further regulatory intervention….? Or might it simply be too early to say? .”
One can understand their confusion, but this silence from regulators has deterred development of more healthy crypto markets. It has made it difficult for institutional accounts to manage their investments and be certain they are compliant with what regulators expect.
So, greater clarity and unambiguous collective action by the EU, one of the most important financial blocs in the world, responsible for 16% of global GDP, is to be welcomed by those who want to see crypto assets mature - even if this action is inimical to Libra.
Other jurisdictions seem to be taking more interest as well. At the beginning of October, it was reported that the UK’s Financial Conduct Authority (FCA) is currently conducting inquiries into 87 crypto companies, compared to 50 this time a year ago. This increased energy by the FCA is said to reflect its greater willingness to take a tougher line to the crypto currency market.
This again, should be welcomed by most participants in the crypto currency market. The growth of the market has been dogged by dodgy dealing as much as regulatory uncertainty. Both need to become a thing of the past for crypto assets to take a mature and established place in global payments networks.
At Copper, we are delighted to see leadership across the EU beginning to harmonise crypto regulation. Well written and, crucially, implemented legislation will encourage this fast-growing industry to see the EU as an attractive place to base their operations. This will lead to improved protection, for both institutional and retail customers.
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