I recently discussed the European Union's (EU) efforts to establish oversight of the cryptocurrency market in a piece for Cointelegraph. These efforts include the Markets in Crypto-Assets (MiCA) and Transfer of Funds Regulation (ToFR). With this as my backdrop, I was able to interview Eva Kaili, vice president of the European Parliament and one of the world's foremost experts on how to govern the development of new technology. She has put in a lot of time and effort to advocate for innovation as a key factor in creating the European Digital Single Market.
Some of the proposed legal elements, such as the exclusion of decentralised finance (DeFi), rules governed through self-executing smart contracts (Lex Cryptographia), decentralised autonomous organisations (DAOs), and others, have been more divisive than others.
One, you've put in a lot of effort advocating for innovation as the primary force behind building the European Digital Single Market. You have served as the rapporteur for various bills pertaining to blockchain technology, online platforms, Big Data, financial technology, artificial intelligence, and cybersecurity. When drafting laws for emerging technologies, what are the most significant obstacles that legislators typically face?
In order to keep up with the ever-increasing pace of technological advancement, new and creative ideas require room to grow and mature. Then, policymakers will need time to learn about the evolution of new technologies, confer with interested parties, and assess how they will affect established markets. The best course of action is, therefore, not to react hastily to any technological development with a legislative initiative, but rather to give the technology time to mature and for policymakers to educate themselves, understand the benefits and challenges of innovative technologies, digest how they are expected to affect the existing market architecture, and then propose a balanced, tech-neutral, and forward-looking legislative framework. As a result, the European Union takes a “wait and see” stance, allowing us to confidently move forward after we find answers to three key questions: (1) at what point in time should technological development be regulated? In your opinion, (2) how in-depth should the new rule be? Moreover, (3) how wide should the scope be?
There may be new difficulties to face in this setting, such as deciding whether to apply the old rules to the new instruments, or to develop new rules for the new instruments. When attempting the former, it's important to keep in mind that making changes or adjustments to a law that already exists can result in unforeseen repercussions that undermine legal certainty. However, the latter requires more resources, including time, stakeholder input, and inter-institutional review. As there is also a geopolitical dimension to consider when regulating emerging technologies, the answers to these questions will affect the market's growth, the time it takes to accomplish this growth, and the impact of the stated regulation on other markets.
Second, in 2020, the European Commission unveiled the Digital Financial Package, with the stated goals of promoting the EU's financial sector's competitiveness and innovation, establishing Europe as a worldwide standard setter, and safeguarding consumers' investments in the contemporary payment system. In order to gain a competitive edge in a given market, what factors should a regulatory framework take into account?
As I indicated, today, it is more necessary than ever to analyse the global geopolitical dimension and implications of a proposed regulatory framework regarding emerging technology. You see, in today's interconnected digital world, competition between nations is exacerbated by the centralization of technological resources. Among the three major markets—Asia, Europe, and the United States—there is clear evidence of technological interdependence and reliance among the top market participants and the regions they govern. To this end, “digital imperialism” or “techno-nationalism” might flourish where digital goods and services are used as a source of power and influence. Consequently, any potential regulatory framework should be viewed as a source of national or jurisdictional competitive advantage, creating robust, innovation-friendly, risk-immune markets. Over time, it might draw in the people and money needed to keep innovating.
The DLT Pilot Regime and the Markets in Crypto-Assets Regulations were founded on these principles, and they led to the achievement of two important firsts: the establishment of a pan-European sandbox for the testing of DLT in traditional financial market infrastructures, and the creation of the first concrete set of rules pertaining to cryptocurrency, covering everything from crypto assets (including stablecoins) to issuers (and thus market manipulation) and beyond.
The original stigma surrounding Blockchain as a “enabling” technology for fraudulent activities, illicit payments from drug dealers and terrorists on the “dark web,” and “environmentally irresponsible” actions has erected several barriers to any governmental regulation of the technology. In 2018, when you participated on a panel on regulation during Blockchain Week in New York, only minor jurisdictions such as Malta and Cyprus were experimenting with the technology and had legislative proposals to control the industry. Since they didn't understand blockchain, many authorities back then kept saying it was all simply a passing fad. When did you first discover that blockchain technology might be used for so much more than just crypto-assets and crowdfunding tokens?
At an early stage, it became clear to me that blockchain would serve as the backbone for a plethora of applications that would radically alter the nature of markets, commerce, and operations while also having far-reaching macroeconomic consequences. Despite the fact that this technology is still in its infancy, it is already widely recognised as the foundation of any IoT [Internet of Things] ecosystem that makes use of human-machine and machine-machine interactions. Its impact on the real economy is predicted to be decisive, although it is not yet easy to forecast in which way and under which conditions. Nonetheless, the rapid development of blockchain has already forced businesses and government leaders to consider (1) how the new marketplaces will look like in the coming years, (2) what would be the appropriate organisational setting in the New Economy, and (3) what kind of market structures should be formed in order to not only survive the economic competition and remain technologically relevant, but also to generate and sustain rates of inclusive growth proportional to the size of the market. Both the European Blockchain Services Infrastructure projects and the European Blockchain Observatory and Forum initiative are crucial to this end, as they seek to give the EU a significant first-mover advantage in the emerging digital economy by facilitating technological progress and testing the convergence of blockchain with other exponential technologies.
The European Union gave its approval to MiCA on June 30th, its primary legislative proposal to govern the crypto asset market, marking a provisional consensus on how to regulate the crypto industry in the bloc. Decentralized finance (DeFi) has been left out of scope of MiCA despite being recommended multiple times since its initial introduction in 2020. DeFi systems, like decentralised exchanges, seem to run against to the very tenets of regulation. Can DeFi be regulated now that it's at this stage?
Indeed, the initial criticism levelled at the Markets in Crypto-Assets Regulation back in September 2020 from market participants was that it failed to address decentralised finance, the goal of which is to decentralise financial services and render them independent from centralised financial institutions. However, as DeFi, ideally, runs with smart contracts in decentralised autonomous organisational architectures leveraging decentralised applications (DApps) with no entity to be identified, it could not be appropriately accommodated in the Markets in Crypto-Assets Regulation, which is explicitly addressing blockchain financial services providers that are, or need to be, legally established entities, supervised on whether they comply with specific requirements as regards to risk management, investor protection and market integrity, thus liable in case of failure, within a clear and transparent legal context.
We can't really pin down any defining traits of DeFi because it wasn't made to have them. As a result, in this decentralised setting, we need to reevaluate our approach to identifying “the entity” responsible for wrongdoing. Is a system of anonymous participants possible as a replacement? Why not? Unfortunately, our legal and regulatory history does not permit anonymity. At least not thus far. Everything and always should lead back to a responsible person, no matter the architecture, design, procedure, or features of a product or service (or persons). If anything, I think the DeFi case exemplifies the issue of a lack of clear responsibility. So, decentralisation looks considerably more problematic for policymakers.
5. The European Union's push to regulate the crypto and blockchain industry predates MiCA. On Oct. 3, 2018, the European Parliament passed, with an unprecedented majority and the support of all European parties, its “Blockchain Resolution.” In terms of the political economy, how significant is this resolution? In what ways did the adoption of the Blockchain Resolution pave the way for the European Union to become a regulatory frontrunner?
How to regulate a technology that was (and is) still developing was discussed in the European Parliament's Blockchain Resolution of 2018. The key justification for the resolution was that blockchain is the infrastructure for many different applications that are vital for Europe to remain competitive in the New Economy, not merely the enabling technology for cryptocurrencies and crowdfunding tokens. Based on this, the Committee of Industry (ITRE) of the European Parliament allowed the preparation of the resolution: “Distributed Ledger Technologies and Blockchain: Building Trust With Disintermediation.” This was the political entrepreneurship I felt compelled to undertake in order to free up the need for a rule and prompt EU institutions to consider the possibility of regulating blockchain technology's use. My goal in writing this resolution was not just to establish a framework of legal certainty, but also to establish a framework of institutional certainty that would allow blockchain to flourish within the EU single market, encourage the development of blockchain marketplaces, position Europe as the premier location for blockchain enterprises worldwide, and serve as a model for blockchain legislation in other parts of the world. Indeed, the Blockchain Resolution triggered the European Commission to draught the DLT Pilot Regime and the Markets in Crypto-Assets proposals, reflecting the principles of technological neutrality and the associated concept of business model neutrality necessary to facilitate the uptake of a digital technology of critical strategic importance.
6. Various blockchain architectures, especially permissionless blockchains, offer not only disintermediation but also decentralised governance structures with automation properties. As these structures progress, do you believe that in the future, there will be potential for “Lex Cryptographia” — regulations governed by self-executing smart contracts and decentralised autonomous organisations (DAOs)? If so, what guiding concepts or criteria should be considered by regulators?
Since code-based systems will appear to be the most appropriate way forward to enact law effectively in this new environment, “Lex Cryptographia” will soon be developed in response to the continuing technological advancements and the prospect of a decentralised global economy operating in real-time utilising quantum technology, artificial intelligence and machine learning along with blockchain technology. Politicians, legislators, and the general public would face a challenging task if they attempted to do this.
When browsing the “Lex Cryptographia” domain, it will be necessary to provide answers to fundamental issues at the level of the code itself, including: How would one instruct such a machine to behave? When and how will it receive and validate what kinds of data? What is the frequency? How do you plan on compensating the people that keep the network running? When rules are built into the structure of a system, who will ensure that it functions as intended?
In light of the potential for a “Lex Cryptographia,” our conception of what constitutes “sound regulation” needs to be expanded. And this is a challenge for every jurisdiction in the world. A potential next step would be to rely once more on “sandboxing,” as we did with the DLT Pilot Regime, to build a stable yet adaptable environment in which innovators and regulators may meet, learn from one another, and discuss how to best shape the future legal framework.
It should be noted that the article does not provide any suggestions or advice regarding investments. Readers should do their own due diligence before making any financial or trading decisions.
None of the views, ideas, or opinions represented here represent or reflect the views, thoughts, or opinions of Cointelegraph unless explicitly stated otherwise.
Tatiana Revoredo is a blockchain strategist at Sad Business School at the University of Oxford and a founder member of the Oxford Blockchain Foundation. In addition to leading The Global Strategy, she teaches at MIT where she studies the commercial uses of blockchain technology as a senior lecturer. Tatiana has been invited to speak at both the public hearing on Bill 2303/2015 in Brazil and the Intercontinental Blockchain Conference in Europe. She has written two novels: How do international central banks, governments, and other authoritative bodies feel about cryptocurrencies? and Blockchain: Everything You Need to Know
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