I recently discussed the EU's Markets in Crypto-Assets (MiCA) and Transfer of Funds Regulation as they pertain to the crypto-asset market in an essay for Cointelegraph (ToFR). In light of this topic, I recently had the opportunity to speak with Eva Kaili, vice president of the European Parliament and one of the world's foremost experts on the regulation of emerging technologies. She has put forth a lot of time and effort advocating for innovation as the primary force behind creating the European Digital Single Market.
Below is an interview that touches on some of the more contentious aspects of MiCA, including the exclusion of decentralised finance (DeFi), the use of self-executing smart contracts (Lex Cryptographia), and the creation of decentralised autonomous organisations (DAOs), among other topics.
1 — You've put in a lot of effort to highlight innovation as a key factor in creating the European Digital Single Market. You have served as a rapporteur for multiple pieces of legislation pertaining to blockchain technology, online platforms, Big Data, financial technology, artificial intelligence, and cybersecurity. When it comes to drafting laws regulating cutting-edge technologies, what are the most significant obstacles that legislators must overcome?
New technologies emerge quickly, but they require room to grow and mature. Next, authorities must take the time to learn about the evolution of new technologies, interact 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? Two, how much specificity should be included in the proposed rule? 3. How extensive should the scope be?
There may be new difficulties to face in this setting, such as deciding whether to apply old rules to new instruments or to develop new rules from scratch for these instruments. The former is not always workable, and it may have unforeseen implications to legal clarity if alterations or adjustments capture a complicated statutory framework. While the former may be done quickly, interinstitutional review of the latter requires more time, interaction with stakeholders, and other measures. 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.
2 — In 2020, the European Commission released a Digital Financial Package with the primary goals of promoting the competitiveness and innovation of the EU's financial sector, establishing Europe as a worldwide standard setter, and providing consumer protection for digital finance and contemporary payments. What factors should be taken into account by a regulatory framework in order to ensure competitive advantage in a specific country?
As I alluded to earlier, it is now more important than ever to think about how a potential regulatory system for emerging technology may affect international politics. As a result of the centralization of technological capability, rivalry across jurisdictions has increased in the new global digital economy. 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. As such, any potential regulatory framework should be seen as a source of national or jurisdictional competitive advantage, generating robust, innovation-friendly, risk-immune markets, as digital products and services translate to power, have strong geo-economic implications, and facilitate “digital imperialism” or “techno-nationalism.” Over time, it might draw in the people and money needed to keep innovating.
As a result of these guiding principles, the DLT Pilot Regime and the Markets in Crypto-Assets Regulations were able to accomplish two historic firsts: the creation of the first-ever pan-European sandbox to test DLT in traditional financial market infrastructures, and the first concrete set of rules regarding crypto, covering everything from crypto assets, including stablecoins, to issuers, 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. Only a few tiny countries were actively experimenting with the technology and drafting legislation to regulate the industry in 2018 when you spoke on a panel about it during New York's Blockchain Week. Many authorities at the time, due to a lack of knowledge, kept saying that blockchain was nothing more than a passing fad. When did you first discover that blockchain could be used for more than simply crypto-assets and crowdsale tokens?
At an early stage, it became clear to me that blockchain will serve as the backbone for several applications with far-reaching macroeconomic consequences on market structures, corporate and operational models. Even though this technology is still in its infancy, it is widely considered to be the foundation of any IoT [Internet of Things] ecosystem that makes use of human-machine and machine-machine interactions. It is not yet easy to foresee in what ways and under what conditions, but its impact on the real economy is predicted to be important. Nonetheless, the rapid development of blockchain has already prompted both 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 stay technologically relevant, but also to generate and sustain rates of inclusive growth proportional to the size of the market. The European Blockchain Services Infrastructure projects and the European Blockchain Observatory and Forum initiative are essential to this end, as they facilitate technological advancements and test the convergence of blockchain with other exponential technologies with the goal of giving the EU a significant first-mover advantage in the new digital economy.
Four — On June 30th, the European Union (EU) gave its tentative approval to MiCA, its primary legislative proposal to govern the crypto asset market. MiCA was first proposed in 2020, and it has since gone through multiple revisions as certain proposed legislative provisions, such as the exclusion of decentralised finance (DeFi), have proven more contentious than others. Decentralized financial infrastructure solutions, including decentralised exchanges, appear to run counter to the most basic concepts of regulation. Is it feasible to implement regulations on DeFi as it stands now?
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, 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 t, is not a good fit for DeFi as it operates ideally with smart contracts in decentralised autonomous organisational architectures leveraging decentralised applications (DApps) with no entity to be identified.
DeFi isn't meant to be viewed as a “thing,” at least not in the conventional sense. As a result, in this decentralised setting, we need to reevaluate our approach to identifying “the entity” responsible for wrongdoing. Its anonymity raises the question of whether a network of fictitious characters might serve as a suitable alternative. Sure, why not. Pseudonymity, however, is incompatible with the norms of American law and regulation. So far, at least. Everything, always, should go back to a responsible person, no matter how complex or simple the product's architecture, design, method, or attributes (or persons). To me, the DeFi case is illustrative of the issue of ambiguity around responsibility. As a result, it appears that decentralisation poses a significant challenge for policymakers.
Fifth, the European Union's push to regulate the blockchain and cryptocurrency business predates MiCA. How significant is the European Parliament's “Blockchain Resolution,” which passed with a historic majority on October 3, 2018, from a political economics standpoint? In what ways did the Blockchain Resolution's passage play a pivotal role in getting the European Union to take the regulatory lead?
How to regulate a technology that was (and is) still developing was discussed in the European Parliament's Blockchain Resolution of 2018. Proponents of the resolution argued that blockchain is more than just a tool for cryptocurrencies and crowdfunding tokens; it also provides the backbone for numerous other applications that are crucial for Europe to maintain its competitive edge in the New Economy. The European Parliament's Committee on Industry (ITRE) used this information to greenlight the writing of a resolution titled “Distributed Ledger Technologies and Blockchain: Building Trust with Disintermediation,” which I felt compelled to author as a bit of political entrepreneurship necessary to unlock the demand for a regulation and trigger EU institutions to consider the possibility of regulating the uses of blockchain technology. Consequently, my goal in drafting the resolution was not merely to establish a framework of legal certainty, but rather to establish a framework of institutional certainty that would allow blockchain to flourish within the EU single market, facilitate the creation of blockchain marketplaces, make Europe the best place in the world for blockchain businesses, and make the EU legislation a role model for other jurisdictions. The Blockchain Resolution did, in fact, prompt the European Commission to draught the DLT Pilot Regime and the Markets in Crypto-Assets proposals, both of which reflect the principles of technological neutrality and the associated concept of business model neutrality necessary to facilitate the adoption of a digital technology of critical strategic importance.
6 — Permissionless blockchains, and other blockchain designs, offer not only disintermediation but also decentralised governance structures with automation properties. Do you think that “Lex Cryptographia,” regulations governed by self-executing smart contracts and decentralised autonomous organisations (DAOs), will find a place in the future as these structures develop? In that instance, what guiding principles or standards should regulators apply?
Because code-based systems will appear to be the most appropriate way forward to effectively enact law in this new environment, the development of “Lex Cryptographia” is imminent in light of the continuing technological advancements and the prospect of a decentralised global economy operating in real-time using quantum technology, artificial intelligence and machine learning in addition to blockchain technology. Politicians, policymakers, and the general public would face a difficult challenge in attempting to accomplish this.
Navigating the “Lex Cryptographia” area necessitates answering fundamental problems at the level of code, such as: what would such a system be programmed to do? How will it gather and validate the information it receives? Just how often is it? Is there a plan for compensating employees whose job it is to keep the network running smoothly? 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. This is a problem in every country's legal system. One solution is to use “sandboxing” again, like we did with the DLT Pilot Regime, to build a stable but flexible environment in which innovators and regulators may meet, learn from one another, and shape the future legal framework.
No suggestions or investment advice are included in this article. Readers are encouraged to do their own due diligence before making any investing or trading decisions.
All opinions expressed here are those of the authors and not necessarily of Cointelegraph.
At the University of Oxford's Sad Business School, Tatiana Revoredo specialises in blockchain strategy and is a founder member of the Oxford Blockchain Foundation. Not only is she the chief strategy officer at The Global Strategy, but she is also a professor of business at the Massachusetts Institute of Technology and an authority on blockchain's commercial uses. Tatiana was invited to both the public hearing on Bill 2303/2015 in Brazil and the Intercontinental Blockchain Conference in Europe. She has written two books on the topic of blockchain technology: Blockchain: Everything You Need to Know and Cryptocurrencies Abroad: How Do National Governments and Central Banks Feel About Digital Currency?
