18 October 2024
Ian Simpson | 46 min read
The topic of MiCAR – the European Union’s Markets in Crypto Assets Regulation – is top of mind for crypto asset service providers (CASPs) not just in Europe, but also around the world. The implications of MiCAR for the current crypto market and its potential to shape institutional involvement in the space are wide-ranging and far-reaching.
In this episode of RULEMATCH Spot On, host Ian Simpson spoke to Dr. Joachim Schwerin, Principal Economist at the European Commission and a contributor to the drafting and writing of MiCAR. Together they discuss MiCAR’s background, implications for stablecoins, liquidity, bank and broker operations and much more.
Episode show notes:
00:55 Intro and Dr. Schwerin’s background in drafting MiCAR
2:52 How big a deal is MiCAR (really)?
4:32 The second part of MiCAR’s development
6:52 The danger in global convergence of rules
7:48 The true scope and scale of MiCAR
9:30 How MiCAR reverses the “burden of proof” onto regulators
10:45 The need for a liberalization of financial markets with MiCAR
11:28 How will MiCAR change the crypto market in 5 years?
13:45 How the crypto community should consider regulation
14:19 Traditional financial regulation for crypto is “dead”
15:40 MiCAR: horizontal or vertical?
16:10 The real things to look for in 5 years
17:10 Bottom-up innovation needs new forms of regulation
17:45 MiCAR as a desire to target specific market players
19:02 Creating a “radical place that is driven by experimentation”
19:12 Why educating “the right” way is important
20:06 The influence of MiCAR on regulation in other places
22:40 Why competition goes beyond just company vs company
23:49 MiCAR in the context of industrial policy
24:40 MiCAR and GDPR as EU exports
25:56 GDPR as the first crypto regulation
28:20 Specific implications of MiCAR for: best execution
32:07 The ongoing discussions around best execution
33:43 Specific implications of MiCAR: liquidity
34:50 The political reality around stablecoins
35:20 Competitiveness, the dollar’s decline and Europe’s imperative
36:26 “Deal with it”
37:30 Analyzing the “protectionist” view of MiCAR
39:26 How global crypto players will adapt to MiCAR
41:05 Stablecoins as a passing phenomenon
41:59 “MiCA prohibits nothing…”
42:34 Specific implications of MiCAR: tokens deemed securities
46:44 The potential for tokenized assets in Europe
50:10 A curious case of private crypto tech
51:21 Jealous of Switzerland
54:01 Thoughts on Switzerland’s DLT law and MICAR 2.0
56:38 NFTs and MiCAR
58:40 NFTs in the financial domain
1:01:10 The “unexplainably” strict rules around reverse solicitation
1:04:50 The pace of 2nd-level standards publication from ESMA
1:05:44 Is the tail wagging the dog?
1:07:25 The unhealthy focus on a few standards
1:08:59 The number of CASPs in the pipeline for MiCAR
1:10:33 How long will it take for MiCAR to “populate” across European countries?
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Episode transcript
Dr. Joachim Schwerin:
In that regard, me, MiCAR is a success because we have something workable.
But now, of course, comes the moment where a lot of provisions have to be studied in detail.
What does it really mean?
A number of provisions have been finalized in a very short timeframe at the end of political discussions. That is always a compromise.
So, of course, certain parts of MiCAR are not perhaps 100 % politically in line with other parts of MiCAR because different people from different parties and different interests looked at this.
And this is now material that we can work with.
Ian Simpson:
Hello and welcome to another episode of RUMATCH Spot On, the only podcast focused exclusively on the institutional crypto and digital assets industry.
I’m your host, Ian Simpson.
And if you want to know what banks, security firms, hedge funds, asset managers and others are doing in crypto and how they’re doing it, this is the place for you.
My guest today is Dr. Joachim Schwerin. He’s a Principal Economist with the European Commission and he’s been closely involved in helping to draft and shape the MiCAR – Markets in Crypto Assets Regulation from the European Union.
Dr. Schwerin, welcome to RULEMATCH Spot On.
Joachim:
Thank you so much, Ian, for having me here today and for hosting this discussion and welcome to everyone out there for what I hope is a fascinating journey to MiCARland.
I’m Joachim Schweren. I work in the unit that is responsible for the digital transformation of industry at the European Commission.
My remit is policy development for all types of blockchain, crypto and token applications for the real economy.
I’ve also been involved in all the financial aspects of the blockchain work of the European Commission, be that the MiCAR regulation, the DLT pilot, the digital euro work, etc.
And we have a long track record within the European Commission of having a positive attitude towards blockchain technologies already for the last 10 years.
We think that it is a game-changing technology to the benefit of companies of all sizes and citizens to be empowered for more self-organization regarding their value propositions in their daily work.
And I’m very happy to discuss now specific aspects of this year today with you, Ian to see what we can learn from the work on the MiCAR regulation, but also perhaps related things.
Ian:
Very interesting. Let’s dive in.
So just starting off kind of high level, when we think about MiCAR, it would be interesting to know your perspective.
How big of a deal is this legislation?
Many people are talking about how important it is. I wonder sometimes if people overestimate the importance of MiCAR or if they underestimate the importance of MiCAR.
What do you think?
Joachim:
It’s a very complex question because first of all, it depends on your expectations and then also on the context.
I would say if you look at the whole crypto universe of what we have out there in terms of tokens and business models, MiCAR covers a tiny part of that universe for a number of reasons that we might go into because originally MiCAR, as we see it now in 2024, is the result of a process that started about six years ago.
In 2017 we had the ICO hype. It was then the idea of some forward-oriented people in the Commission to further explore the opportunities of that.
We know with the ICOs that at the end of the day it didn’t work out as expected. It was over relatively quickly.
But people without having a political mandate, which is the normal case in Brussels that you have a work program and then you are supposed to draft a regulation.
That was not the case, but people were sitting together, a few colleagues, and looking at how can we actually support these new types of business models.
Now we are in 2024.
So the world, especially the crypto world, where innovation is so fast, as we know, that it evolves massively quickly, is so much further than MiCAR itself has much developed.
It has additional parts, which is mainly the stablecoin part that came two years later when politicians were getting concerned about the Libra project and then asked us to make a stablecoin regulation.
And then we combined the stablecoin part with the very liberal utility token part, as I would refer to it, and came quite quickly with the proposal of the MiCAR regulation.
After that, it entered a political process as always in Brussels.
We call that a trialogue where the European Parliament with its committees and different parties is in detail looking at it, but also the 27 member states.
You know that we are developing rules that apply to 30 countries, so 27 EU member states plus three associated countries.
And that means that it is a very detailed and long political process where all sorts of changes are being proposed before an outcome is there.
That was then finalized and then comes what is now in discussion, the Level 2 standards.
So once you have a text, the text is, I would say, asking a lot of more detailed questions on interpretation, on filling certain provisions with life.
And then comes the discussion on the technical administrative standards. This is where we are now and that is again another phase.
So in that sense, MiCAR is a hybrid product to put it like that.
If you look at the substance of what legal certainty does it really give me for my business model in crypto and how innovative is it, you could say that the focus is relatively limited.
If you however approach it from a broader perspective of taking the perspective of bringing 30 countries at the end of the day together, very different decision makers from all political colors to have a much more intensive dialogue than you would have in one country where you basically have a government that decides at the end of the day, you get a product which is more or less the best of our knowledge at the current moment after all these times.
So I’m not saying it’s a perfect product.
No one is saying that.
But I think it is a very honest product that shows what is possible in a political context at this moment.
And that is, in my opinion, also a reminder for people that are always calling for global convergence of rules.
I mean, imagine now that on top of all these countries, we got the US, we got China, we got all the innovating countries everywhere in the world on one table and would have to decide on a set of commonly applied rules.
That would be very challenging if not nearly impossible. So I think in that regard for me, MiCAR is a success because we have something workable.
But now of course comes the moment where a lot of provisions have to be studied in detail.
What does it really mean?
A number of provisions have been finalized in a very short timeframe at the end of political discussions.
That is always a compromise.
So of course, certain parts of MiCAR are not perhaps 100% politically in line with other parts of MiCAR because different people from different parties and different interests looked at this.
And this is no material that we can work with.
Ian:
So in one sense, you could say that the actual scope of the law is perhaps limited, less important or less big than some people might think.
And yet from a market perspective, the European Union as a group, as you say, of many countries and economic activity, it’s really quite big.
Joachim:
It is quite big.
I think that is something, and I don’t like that word…some people refer to it as the Brussels Effect because…people tell us, and that might be or not, that we are good on regulation.
I mean, the narrative, and I don’t agree to that, is that innovation is mostly coming from elsewhere.
But then we are regulating that.
I would say, first of all, I’m not the typical regulator, certainly.
I look at opportunities, and I must say the whole MiCAR team looked at opportunities of how we can actually support these business models.
Also, we have massive amount of startups in Europe, so that’s not really a lack of ideas as such.
But I think the key novelty is indeed to bringing that together and feed that into a political process, which is now much bigger in terms of effect than was originally foreseen.
Originally, I mentioned briefly the utility tokens. The whole idea was to take the existing prospectus regulation, where you have for financial instruments, prospectuses that Dublin is requiring.
They are also driven by all sorts of concerns, always negative attitude first:
“What could be a risk, what could be a risk, et cetera.”
And then you go on hundreds of pages of all your risks.
And we said, we reversed that.
So as we fully believe in the potential of blockchain, we have said from day one that we see blockchain as a game-changing technology to the benefit of society.
So we want to foster it. And that’s where we said, okay, look, let’s see the opportunities.
Let’s get rid of this prospectus. Let’s make a white paper that should only be a couple of pages on your business model, basically a pitch.
And we went even further and that is still in MiCAR on utility tokens that you do not need to wait for approval from your national regulator.
You send your white paper to a national regulator. The burden of proof is reversed on that regulator to prove to you based on existing legal principles that you do something wrong.
Otherwise you can go forward.
You don’t even need to wait for the response for your national regulator, but you can already issue the token and you have a passport for 30 countries. That is revolutionary.
That is the first thing in the financial domain that we have something like that.
That was the core idea.
And that is relatively narrow on things that are not primarily financial. Then because of the political will to include the stable coins and the ensuing discussion that now everyone in crypto feels they should somehow fall under MiCAR, which I fully contest because that has never been the original idea.
People are getting disappointed because they feel that it’s not very clear on my business case, it’s not very clear on my business case either.
But it was never forget that the basic idea of MiCAR is a liberalization of traditional financial markets, which in my opinion are more and more getting obsolete in the digital domain.
And I think that idea is developing some traction. So it’s not only the size of European capital markets or whatever, but it’s this basic idea that we consider blockchain and the applications that are in between the financial world and the real economy, which is my domain, that these are fundamentally positive and need to be supported.
And that is a traction that I feel very strongly now in also lot of countries outside the EU.
Ian:
So this regulation is coming into force. It’s potentially going to have revolutionary effects and potentially changing things very much.
If we sat down and had this conversation in five years or so, how do you expect or how do you think that this regulation will have changed things?
And I’m thinking in particular for certain market participants, whether it’s for a crypto startup, whether it’s for a broker, for an exchange, for banks who want to deal and work with this technology and with crypto assets.
What is your expectation of how things will change?
Joachim:
The main thing in my opinion is that in five years we will have better educated decision makers.
We will have more mature markets. We will be five years again ahead in this discussion, which is a very positive element. In a way, a regulation as I see it, especially this one as it is a novel one and not just the so many three iterations – is a learning curve.
And I think that is the thing that we are doing.
Now we have a text. Now everyone is looking at the details and is coming with very detailed questions to us.
What do you mean with this? How does this part of the regulation deal and relate with another part of another regulation? How can we bring that together?
And these are questions that cannot immediately be answered because even if you are an experienced policymaker,
And most people that have actually worked on this document also in the parliament and the national countries are not experienced crypto policy makers.
You will never be in a position to think through all business cases as such.
So we have a lot of questions now which are being discussed. There’s a number of initiatives like a round table with the ecosystem that I attended in Zug earlier today.
It goes also to a number of other countries where people from the market are coming together not only discussing questions, but also proposing solutions.
That I find very strong because I think that the ball is indeed in the field of the crypto community.
They should not really see a regulation as cut in stone forever, but they should actually see it as something that they can hopefully can influence, improve and give other reality check of what is going on out there in these models.
And this effect will lead in five years to a much better understanding of crypto models.
It will give us a more realistic view on what should actually be regulated and what should not be regulated. I think, as said, the Commission took, in my opinion, rightly a very light and liberal approach.
But the more it gets up into the higher political discussions, but especially in the regulatory domain from the European regulators, the more top-down regulated it again becomes.
And I think that is the wrong approach. So we are having a major discussion ahead of us as regards to the current architecture of the supervisory authorities, but also of the political process still suitable to crypto.
And in my personal opinion, it is not.
And that is also what I tried to explain when I, for example, educate upcoming financial regulators or basically everyone out there in different formats. Traditional financial regulation in the field of crypto, in my opinion, is basically that.
And the reason for that is the advances of the technology.
Now we’re only talking blockchain. Now think of the combination of blockchain and AI, for example, of the business models that this brings about.
Think of supercomputing and quantum, of what that means in terms of encryption and standards.
There are so many questions where technology is not only as an individual technology moving so fast forward, but also in the re-combinations that you will simply never again be in a situation where you have a regulation.
And then as on banking or on capital markets, you sit in your chair, five years later, you revise it, you say that, Article 23 paragraph, whatever, can be a little bit fine tuned, et cetera.
That is not the crypto reality. The crypto reality is disruptive.
And that is why we need a different process in order to deal with that. And it refers back to what we discussed on MiCAR.
There are people who think that MiCAR is a regulation that is horizontal in a way that you have MIFID for financial instruments that you have the e-money directive, and now you have MiCAR as a sort of horizontal thing next to it.
MiCAR is below MIFID.
The original idea is basically to say that we want to have a more lenient approach for things that exactly are not financial instrument. And if we come to five years of what will be next after MiCAR, it is not MiCAR 2.0.
What is next after MiCAR is to find a meaningful approach towards decentralized infrastructures.
And that is something where traditional financial regulation has no role to play because that requires intermediaries, that requires the traditional approach on how you formulate that.
And if look at DeFi, DAOs, other areas, you do not have that, which is the reason why it is excluded.
So for me in five years, we will have a much more informed discussion on what governance in a decentralized context really means, what is possible, I would say, outside the traditional regulated domain.
But also all these hard horizontal questions that so far we do not ask, for example, on product liability.
Product liability in the financial domain is something completely different than it is in the real economy or also in the decentralized domain.
We’re basically in a normal environment that I’m now discussing in terms of DeFi, DAOs, NFTs. We do not start with KYC first and what is the risk assessment and who is to blame when things go wrong, but we start with collective innovation that is simply not seen unless they do something which perhaps results in a product or service that competes in a regulated market.
And that is a bottom-up approach which needs new forms of regulation. We don’t know yet what can be embedded, can be, let’s say, given by the sector itself, can be other solutions that is for discussion, but it will not be traditional regulation.
Ian:
So you wouldn’t say that in the process of creating MiCAR and refinancing and so on, there was ever a discussion that certain players in the EU, but also globally, whether brokers, exchanges, whatever, “We need to make this regulation such that they change how they operate in a targeted way so that it becomes more professional or more safe in some sense.”
Joachim:
This is, of course, one of the dimensions.
And there are a lot of people that focus specifically on this dimension. That is a bit the traditional approach that, yes, it is my money, but I prefer to give my money to an intermediary and I want that this intermediary is completely safe and that the risk is completely limited.
And when then there is an investment that consumer protection comes first and all of that. And I have no objection to that system. It is just not my system.
So what I mean is that we all have different preferences as individuals.
And I think that there should be an area that plays according to these rules, that should professionalize, that should be more transparent, that should also meaningfully use innovation, but in a well-structured and definable way.
But that is not the potential of the technology. The potential of the technology is disruptive regarding self-organization.
And that means there must also be a space which is much more radical, which is basically driven by experimentation.
When I look at my money, a certain part of my money goes into things that are much less secure than I would say traditional investments, but that is because I think it’s for the good cause. That can be for small things like some peer-to-peer platforms that do something useful in my opinion, or that can be for new business models where I think that’s exciting.
I would like to support them a little bit or whatever.
And I think, and that’s the bottom line of it, it’s my right to do so.
I, as an individual, completely object that I need to ask anyone, whether that’s the state, whether that’s any sort of, let’s say, security operator or whatever, for permission. I do not need to ask for permission.
It is my money, it is my resources, it is my life.
And that I want to see depicted also on regulation. Regulation must limit itself to the bare minimum and the rest must be possible to do.
So in that sense, I would not say we’re trying to educate the world as such, but it is very important to educate in a way that all these things have the right to exist next to each other.
It is for you, for me, for anyone out there to decide in which world they would like to live. But I don’t want my way to be corrupted by other ways simply because other people like it.
Ian:
And with MiCAR as a regulation for, as you say, 30 countries altogether.
That is quite a big scale. How do you think this will influence regulation in other areas?
I mean, we talk about first mover advantage. Maybe some people could say it’s first mover disadvantage since others will be able to observe what the EU comes with and say, well, we will adjust to make our place more attractive.
How do you think that will play out in the next years?
Joachim:
I think it’s a nice question because that again gives us the beauty of a multipolar world.
I mean, I know and I agree that a number of countries out there, and it’s not the traditional countries, we all know that by crypto basically the whole world is experimenting and using that, which is very good.
A number of small countries are more innovative than we are. But you mentioned the size. I mean, we are a very big jurisdiction and we perhaps add to that discussion a new element.
We are not the most innovative ones, but we are meaningfully big enough in order to contribute to the development of crypto markets, but then perhaps in a safer or more structured way.
And again, the choice is out there where you go.
I mean, I like the approach in Switzerland very much. Switzerland has a credible tradition of being independent, but at the same time very much focused on institutional players and on safety and security, which is nice.
There is Liechtenstein. I like it very much, which is very innovative as a small place. They can be more radical, like with the token law, than we are, but at the same time, our rules apply to them.
So they have to find a balance, which is a very interesting case.
There are other entities out there where I would say – in Asia, you have a number of countries, for example, where we know how innovative they are, but would you bring your money to Hong Kong? I’m not that sure, given the political situation or whatever.
I think we have certain benefits in Europe, where you have a safe place to be, but you can also be innovative.
So what I’m saying is, everywhere in the world, the package is slightly different. And that is what I actually love about regulation. I said that I’m not considering myself as a regulator. I don’t like regulation too much because…
I always see the political process and the end result is certainly different from what you want to put in.
But the nice thing is that competition does not only exist between private companies and business model, competition also exists, of course, between countries or between legislations.
And this is nice to see because coming also back to your question, what will be in five years? In five years, we will also know where the money is going.
And actually, to give you the example, everyone’s discussing their twisty elections in the US. I mean, a lot of US companies came to us over the last one or two years basically I would say to hedge their risks.
They didn’t know what was coming so if it goes too much wrong in the US maybe to have a foot in the door in Europe is not too bad.
I wouldn’t say I see too much of that anymore with certain exceptions but to have mobility in the world and see what also can work is a nice thing to have especially if you combine it with experimentation.
So just try that out if you don’t like it okay go somewhere else and that is an interesting aspect that relates back to another question you asked.
Is it really for Europe?
I mean, if I would take the industrial policy of competitiveness hat that somewhere is also sitting on my head, I would say that it has all to be in Europe or in the EU. But I don’t see it like that because I see the technology as really beneficial to potentially every human being that is on the planet.
So it is much more important that we develop the technology in the various use cases than that we fall back into this rhetoric of I want to take it away from you and I want to have it here.
The crypto space is still so small it can massively expand and then there’s place for everyone.
So that is I think what the ambition should be.
Joachim:
And do you expect, I mean we’ve seen in the past with regulation from the EU GDPR is one example where it does start in Europe and then emanate out across the world.
Is there a possibility that Europe does really lead the way and exports it to other countries and people more or less fall in line or do you really expect there to be quite differences?
I would say it really depends on what will now happen on the basis of MiCAR with standards and that’s an exciting question.
If we manage to, I would say, “ring fence” the negative repercussions from certain Level 2 Standards and really focus on the core of MiCAR, which is a positive one, then I can think it can be an attractor.
But if we again fall back into the logic, which I see in some parts of the market, that people are starting to say, let’s go back to MiFID because at least we know what we’re dealing with, then that’s certainly not the purpose.
So for me, that is an open question of the direction that it is going to. But in general terms, I think that the sector will massively expand simply because it is in the interest of people to have these tools available and self-organize themselves.
To what extent that is beneficial to Europe at the end of the day in our hands.
Let me just say a few words on GDPR because you mentioned it.
I mean, I still know the time when we drafted GDPR and when I was responsible for SME financing and I had the whole year, nothing else to do than have angry small and medium sized enterprises coming to me.
Because basically they wanted to complain about GDPR.
That’s a typical example of a regulation where I fully appreciate that it has a lot of things that people at first sight find terrible and that they find as intrusive and full of bureaucracy and stuff like that.
But let’s not forget the core idea of GDPR, which is also why I think GDPR is actually the first crypto regulation, not MiCAR.
GDPR is a regulation that directly looks into the direction of Web3 and not Web 2.0.
Web 2.0, in my opinion, is a completely corrupted space from big techs that basically take your data, which should belong to you, make the business case out of you, become stinking rich, and at the end of the day, you have the peanuts.
Whereas we have the opportunity to, with all what we discussing here, develop a much more democratic and decentralized Web3.
But that requires autonomy on data and the possession of data by the individual.
Now, I see the individual, or perhaps we see the individual, as a sort of fragmented thing that forms part of different communities, where a part of your identity, also digital identities, in these different communities.
You own your data.
Actually, the data starts to exist normally when you have interaction with others in transactions, and it’s for those communities to decide what to do with this data.
That requires a fundamental and radical approach towards data ownership and ultimately data transfer, which is embedded in GDPR.
So GDPR has a good core, but again, in all these processes has become a little bit complicated. But it’s completely consistent with the discussion that we are having on crypto, because the whole difference between what we try to do in Europe and what happens in other parts is that we want to base the decision making on the autonomy of the individual or of the collective in the decentralized space and give them the rights and not give that to a part of the space of the intermediaries that basically have completely different interests.
Ian:
We’ll get back to the Level 2 implementation topics and so on and some of the challenges around that, but let’s dive down a little bit into some of the implications, not to go one, two, three, four through the text of the law, so to say – but some of the things that are perhaps important to players in the space, perhaps even to us at RULEMATCH.
There is a term from traditional finance which also applies in some sense to crypto markets, “best execution.”
We had a guest on the podcast recently who I asked about this, Kevin de Patoulle from Keyrock, and his comment was “It is basically impossible” to offer best execution in crypto markets just because of the fragmentation of liquidity all around the world.
MiCAR addresses best execution to a certain extent.
Can you just give us some background on the thought behind that and the potential for implementation around that?
Joachim:
I will be happy to do that to talk a little bit of the background and how I see that. I would not go into every technical detail because also these discussions are ongoing and indeed as you say and also as you said, your guest rightly said that this is a very complex thing.
In my opinion, we have to start from the facts, which is basically also the technology.
And if you look on the one hand side at the liquidity or not of the market of how that is organized with emerging market structures, with the question of what are platforms actually doing?
Are they pulling liquidity or are they only giving access to liquidity then there’s a time lag behind these things.
And if on top of that you consider blockchain technology, let’s consider traditional blockchain technology, where you take individual transactions, but then you pool transactions into a block.
So you have a time lag in these things. And then only when the block is full, so to say, the hash comes on top of it and it is being done.
It gives a certain discretion, of course, when it comes to best execution.
And of course there are two different perspectives.
There’s what I would call a traditional regulatory perspective that always looks at the worst case, where basically they would probably argue that what we discuss on liquidity, but also the technical working of the algorithm and the process of putting that on the blockchain gives scope for perhaps manipulation, if you would like to phrase it like that, or for ambiguity as regards to whether best execution is met or not.
I think it is very difficult to dismiss that from a theoretical perspective. It’s the question of actually what you want.
I think that when you look at best execution, crypto markets offer much better solutions than traditional markets in many different ways, but there are not and cannot be a full guarantee that it actually works.
So it’s a gray zone in a sense.
The question is how do you approach a gray zone? Do you approach that from a very rigid perspective of “Now, everything is a mess, but now we have something new, so we want to prevent that anything is a mess.”
I don’t think that’s a realistic option.
Or do you say that, “Let’s see how they develop their business models and how well that can be done.”
And then we see how it works in practice that I find a much more productive approach. But indeed, if you want to prevent any form of abuse that comes from this type of innovation, I think it would be probably nearly impossible to do.
I don’t want to live in a world basically that has zero crime because a world that has zero crime means that it is completely totalitarian, that it’s completely stipulated in advance of who does what.
I think that a technology comes with certain risks as long as the risks are small and we know that the risks are smaller than in traditional capital markets. I think that this cannot be the key issue.
But as said, there are certain discussions going on. I do not want to influence these discussions. It is my take that certain topics are massively exaggerated and for me best execution is a topic that is actually much exaggerated in the discussion.
Ian:
So that’s an ongoing discussion involving also from the perspective of financial institutions in the EU who will then be potentially offering these investments to their clients and then would fall under some rules for best execution.
Joachim:
It does. I mean at the end of the day I don’t know and I will not name now any specific companies but at least my personal experience with CASPs when I trade tokens is that it is and remains to a certain extent trust-based.
I mean, I understand the technology, I understand the business model.
Business models are different at the end of the day.
By way of example, if I trade Bitcoin there are price offers, there is a certain time lag.
There is a difference in the price that I ultimately pay than when I see it for the first time and start the transaction because just of the little time that is in between, as long as that is not massive, as long as it is part within the spectrum, I don’t have a problem with that.
I mean, if I go to my traditional intermediaries and I buy funds or whatever, what do I pay? 3.5 % or whatever transaction fee. I mean, that is not what we’re talking about here.
I think we should put things into perspective and not exaggerate certain small items.
Ian:
Understood, understood. On the back of that then there is the topic of liquidity and you mentioned fragmentation of liquidity.
Now the EU brings in MiCAR and makes some pretty clear guidelines about operating within the market and sourcing liquidity and so on.
Some people have said this is kind of like “putting a wall” or so on around the market.
Do we understand that correctly, that market intermediaries in the EU will only be able to source liquidity within the European Union?
And how does that play with a global crypto market?
Joachim:
I think that is not per se a consistent MiCAR aspect, but that relates to parts of MiCAR.
I mean, again, if we look at what MiCAR actually was supposed to be in terms of utility tokens, I would say non-stablecoins to put it in a simple non-technical term, then that consideration cannot play a role because that is a truly global market where basically you try to develop business models.
When you look specifically at stablecoins, this is indeed part of a political discussion that creeps in where, at the end of the day, the legislator has decided that the stablecoin provisions are also used for promoting the euro.
And that is something that we actually also have on the digital euro or other files.
So basically on stablecoins, as we know, there are provisions that part of the reserve have to be in specific locations in euro, et cetera.
And that you can say is a competitiveness angle. Now that is an aspect that, of course, you also have in other jurisdictions.
I mean, if I look at likely developments in the US, regardless of who will win the election, stablecoins will be very high on the agenda.
But I think, that is an expectation by many people, that they will use stablecoins as a competitive advantage for the US.
And the basic background for that is that the role of the dollar as the world reserve currency is massively diminishing.
We are below 60 % now from much higher values before. We know from economic history that every 80 to 110 years, there’s a different lead currency in the world.
We now see that with the dollar, the dollar will disappear as the world reserve currency within the next 10 years. I’m fully convinced of that as an economist because we see many alternative projects coming up.
And they realized that 99.8 % of the markets in stablecoins are dollar denominated.
So they will probably come up with something relatively liberal, but dollar denominated to bring that here.
And in that regard, I find it legitimate that we in Europe are saying “We have a euro and we also want to strengthen the role of the euro.”
And this discussion is evolving.
At the beginning, everyone was saying, well, are you stupid or there are no market cases or we have Monarium, of course, which is very good, but few others.
Now I see an increasing interest that the rules are there in order to develop that further. And that’s an interesting effect also of MiCAR that you have been asking about. mean,
There’s a massive difference between rhetoric when things are not yet in place and when things are in place and you just have to deal with that.
And I think that also creates new business models that will also result in more licenses.
We are seeing that.
I mean, that’s a recognition of facts that will then exist. And that is better in a way than having no regulation at all, because with no regulation at all, we wouldn’t have any development basically in Euro denominated stable coins and now we’re seeing it.
I’m not saying that this is the future. I’m not saying that it will be massive, but at least I’m saying it’s more competition and more competition is always good.
Ian:
So you’re saying that the stablecoin regulation does kind of have that ring-fencing objective or, I hesitate to call it protectionist view, it lines up with that somewhat.
Joachim:
It does in a way, but it is very interesting, I would say, from an intellectual perspective, Ian, because if you see the timeline, and there’s at the moment already scientific research emerging on actually how was MiCAR designed, and it’s very interesting along these six or seven years, this consideration is not included in the original proposal.
This consideration came later through the political process.
So that’s again the thing when you do have a political process. You have a financial regulation, but a financial regulation will always be used for other policy objectives as well.
I mean, we had this, in my opinion, utterly stupid discussion on the energy consumption of Bitcoin.
In my opinion, proof of work is the absolutely best consensus mechanism that we have because it’s the most democratic one.
We know that it uses more energy than other things, but I mean streaming and all sorts of stupid things also use massive amounts of energy and no one is discussing that at the end of the day.
But that is something that you get. You get all sorts of other policy considerations.
I mean if you have a European Parliament where in these committees you have from the far left to the far right and everyone in the middle sitting there, they all want to have their ideas in every form of regulation, which is why you have that type of result and then it creeps in.
So yeah, there are also competitiveness things in that. I find that okay.
If you can really demonstrate and I think that’s the case that it is for a small segment of a regulation that is also a small segment in the crypto space.
So to have these rules, I don’t find problematic.
If you don’t like it, go somewhere else or don’t care about it at all, like tether or do whatever you like, you have choice.
Ian:
And when you think about Europe and in the global setting, mean, there are global players.
Some based in the EU operate in other places, some from the US operate in other places, some from Asia operate in everywhere.
And I’m sure in the conversations you’ve had with them and others, people are considering, we continue operating the same way or do we, yes, come and really set up in the EU for these reasons as the political discussion develops?
Do you think that will be the end result that there will be a Company A (US) Company A (Europe) Company A (Asia) and so on or…?
Joachim:
That is, I would say, problematic from a certain perspective because as said, there’s always a massive difference between the narrative that you get and what they’re actually doing.
I mean, I’ve worked long enough in industry and was also involved in state aid control and things like that.
I know that when you have a company that, for example, wants to build an industrial plant somewhere in Europe.
They all come with all sorts of threats that I’m only going there if I get half the money from the state or if you build me a power plant or if you do these things at the end of the day.
This is rhetoric. This is a negotiation.
I mean, if the whole deal is not good enough that without some meaningful support, whatever that is, you come to Europe, then stay away of Europe.
This is not really something where we are desperate about companies coming to us. We have tons of companies in Europe.
I would be very happy if people would consider us as open and an interesting place to do business.
But specifically, sorry to say that bluntly with stablecoins, I couldn’t care less where stablecoins are located because I think that stable coins are a transitory phenomenon anyway.
I think that there are much more interesting parts of the crypto space, also not necessarily CBDCs, but tokenized assets, tokenized deposits, et cetera, where the long-term trend is heading towards.
Furthermore, if you really have a meaningful stablecoin, then probably it should be designed in the way that is not really an e-money token that packs you against one fiat currency.
Honestly, why would I need crypto if I operate with a stablecoin that is purely dollar or euro denominated?
I mean, then I can use dollar or euro myself.
I don’t have certain functionalities, of course, but that for me is not really crypto innovation.
So I see that some people like it. I see that some people want it fine, but this is not the mainstream of crypto innovation that I’m seeing and therefore let them be where they’re happy.
I mean, I think that we should prohibit nothing.
MiCAR prohibits nothing. That’s something interesting.
I can say that because in the public domain, when we started designing the stablecoins rules, there was a letter from five big governments in Europe that’s in the public domain that “You have to prohibit all of that.”
MiCAR prohibits nothing.
But MiCAR makes a couple of statements indeed, which I find meaningful on governance, on compliance, on reserves, and indeed on certain things like Euro denomination on parts of that, which in our opinion makes sense.
But again, if you don’t like the package, then don’t come here.
Ian:
Very, very clear. Let’s move on from stablecoins. I think you referenced it before, but we won’t have to go down that road too much. That stablecoin bit in MiCAR was perhaps a reaction to Libra and there was a strong political will to focus on that as well, maybe made, shall we say, the package bigger and more complicated.
But another part of the package that is still a bit complicated is tokens which aren’t necessarily utility tokens, necessarily stablecoins, things that are more tokens deemed securities that don’t fall under MiCAR, kind of a gray zone.
What is the thinking about them and how they should be treated and how they will develop or how Europe will be ready for development in that space?
Joachim:
I think that is again a learning curve where it’s actually not only confined to MIFID and MiCAR, but you also have that in the European crowdfunding service providers regulation where securities can be launched by them, but they don’t have the possibility to create a secondary market.
So there’s a lot of questions in these quarters also now going on, of what that means.
All of that has been intended as a liberalization because we have the traditional financial instruments, we have the securities that are financial instruments.
We don’t, as you know, have a coherent definition across Europe of what a security is that differs with practical consequences.
And now we said, “Okay, you have new forms of regulation for other segments. And there’s also the opportunity to let’s say have, we would say crypto assets, not financial instruments, but you also have asset securities for the crowdfunding platforms, et cetera.”
Then you design these regulations, you look at the practical cases, and then you see that it conflicts with certain, very often minor provisions and other regulations.
So we have these examples where if we see something and then the market person comes to us and says, “Huh, sounds nice, but this one sentence there over there, which is a problem then you have to deal with that.”
I think one way to practically deal with that is actually to institutionalize this learning environment that we talked about.
So that’s basically sandboxes. So we have that.
One very good example in theory is the DLT pilot regime, where we said that, “OK, as part of this digital finance package where MiCAR is in, and Dora and other things, we also have the DLT pilot regime,” where we say that, “Let’s look at MLTs and infrastructures basically to develop that.”
There was also sort of last minute political idea, which I think was very positive, but the design of that is not good.
And we all know that.
I mean, we can speak about that. We have very limited demand for that.
It has uncertainty as regards to timeline. It has size restrictions, like that.
So it needs to be massively improved, but it is an example of a co-learning space, like also the European blockchain sandbox that we have that looks at crypto models that looks at DAOs and other things on how they can be developed.
And then you identify these problems, these issues, and then you can eradicate them.
That should be a normal process.
So I understand and I respect the frustration in some parts that securities in a way is an ambiguous exercise.
The only thing that I can say on this is indeed be very clear on the concrete impediment that you have.
And let’s find a way of addressing this either through sort of softly a soft law requirement or through a review process of the regulation when it is then coming on.
Because my experience with regulation that includes securities, unfortunately, is you can be as meticulous as you want.
That’s like drafting a text. I mean, when I draft an article, for example, I read it 10 times and I can guarantee you the first time I read it, when it’s online, first thing I see is a typo.
And that’s what you also have as a regulation.
So I see the frustration, but it shouldn’t be seen, it should never be seen as something that is deliberately put there to annoy people.
It is simply something that, okay, has to be worked out in the next iteration.
Ian:
And you said personally, you believe in the potential of tokenized assets and the liquidity that can come out of that and the potential for other use cases.
And how will that fit, how will that develop in the world of MiCAR, MiFID and in between and so on?
Joachim:
I would say the real potential of tokenization and tokens as a container of value for all types of assets, real world assets, deposits, et cetera, we have not even started considering.
I mean, if you take Web3 really seriously and they do that as basically the guiding light when you have the immersive combination of the offline world and the online world.
And you accept that at the end of the day, a token is a value proposition, like money.
Money is not something that is cut in stone.
It is basically a promise. So it is a value. So you take these values, you give it a form, which is a token, and you make that safely tradable.
Then at the end of the day, we’re talking about the integration of a financial system and a real world system because finance at the end of the day is only a service for the real economy.
And that means rules where basically you can take a note, you can tokenize everything.
You can safely trade that on decentralized platforms and where you have the flexibility of combining that with, let’s say, all sorts of things that you would do.
Things like – we now discuss gold denominated stablecoins or diamond denominated stable coins.
So there’s of course a discussion on, for example, commodity based stablecoins where the commodity doesn’t even have to leave the ground.
I mean, imagine that you can give a value to something that you don’t even see that is somewhere. Someone tells you it is there.
You build your tokens on that and you can freely trade that.
That is the vision that I’m having. And it’s not taken so far away because if you look at offline tokenization that has been there for thousands of years, if you look at examples like the stone money of yap where basically a society agrees on the carrier of a token even if in that case the physical token is washed away by the flood or whatever, it still exists and has its value.
You don’t even need a physical thing as a proof of value. What you need is a verifier.
You need something that in your opinion in a trustworthy way – a way verifies the existence of the underlying item.
A little bit the same discussion that we’re having in Germany always with our gold that is lying somewhere in the US or so that some people are saying the gold isn’t there.
So a little bit like Schrödinger’s cat, I mean you have to look and open the wall and see is it actually there or is it not there.
That’s the type of things, how they are designed.
This is such a massive potential that you don’t find that in MiCAR, it’s not covered by Level 2 Standards. You don’t find that in any other piece of existing financial regulation.
But people in an automatic way do that.
Intellectual property is a very good example. At the end of the day, value can be money, value can be ideas, value can be anything, and people already have found very creative ways of trading these values.
For that, we need a stable, I would say, environment.
I’m not necessarily saying regulation, and we are miles away from that. One example that I always like to use, although it’s not primarily, of course, related to stablecoins or whatever, is Tornado Cash.
I mean, Tornado Cash, the judgment, in my opinion, is a scandal, but it reflects the complete dichotomy between reasoning in the financial domain and reasoning in the real economy domain.
We all know that bank robbers regularly use fast cars, mostly Audis, BMWs, go to the bank, rob them, drive back.
You could immediately prevent that.
I mean, with all the technology, every car can be located at every moment.
It’s built inside the car. It’s mandatory.
You can have cameras, you can have access controls, etc.
No one bothers. No one comes to the idea that when you arrest the next criminals that drop these banks, you go to the board of BMW and arrest the CEO.
But that is what you tend to do apparently in the financial space.
So what I’m saying is for this type of economy that we’re moving towards, if we talk about tokenization, we have a completely different approach in the financial domain than we have in the real economy.
And that is the underlying problem.
So what we’re discussing with MiCAR is very intense, it is already very detailed, but it’s tip of the iceberg where we’re actually heading to.
So there’s a lot more to come and we’ll need a lot more work before we actually…
Much more to come, much more to come, but not necessarily in form of regulation.
Ian:
In that sense, are you a bit jealous of Switzerland and some of the regulation that we have in place already here?
Joachim:
I’m not jealous of Switzerland. I’m actually not jealous of anybody, but I like Switzerland for many reasons.
And one of the reasons is actually an approach to regulation.
I don’t like everything that Switzerland does on regulation, but I think that Switzerland has been and is innovative and pro-market when it comes to better access, for example, for small and medium-sized enterprises when they’re raising capital.
I think that they have lean and productive rules in place. And I also think that Switzerland is a very good example of an integration of decentralized crypto technology with a very institutionalized banking sector with safe banks also.
But that for me is a useful contribution as discussed before to a space. It is not necessarily the default. I think that for my personal liking, the rigor that Swiss banks apply in onboarding people for me is too strict.
That’s just for my personal liking. I think there’s an overkill. I know why they do that and it’s competitive advantage in a way.
I also very much like that they now seem to see it as normal that people as part of their portfolio also hold crypto assets in some form.
I think that’s a very meaningful way forward. If you go to your bank and advise as a client that you should invest in this space, this is very positive.
But I think that there are tons of crypto business models out there that might better be served somewhere else.
So I think Switzerland has found a place which is relevant, which is beyond the size of Switzerland. That is very positive.
But I think I said before that the world is big enough also to allow for other reasons and whoever wants it to come to Switzerland to come to Switzerland.
Where I like Switzerland very much and that’s indeed something that I envy is on data protection actually, and on my privacy.
Because indeed they are very limited as we all know of giving access on demands of for example your private communication, et cetera.
When you are with a Swiss provider (I am with a Swiss provider) and that is something which I appreciate very much.
So number of positive things, whatever is only positive in the world.
I think if you look at other examples, Barcelona thrashing Young Boys Berne yesterday evening, probably Switzerland is less…
Ian:
Well, please. we won’t get into the football!
Joachim:
No, we don’t talk football.
Ian:
Okay, then we don’t talk football.
But just back on the tokenized assets, I mean, we have a DLT law in Switzerland that lays things out pretty clearly, and of course, obviously, making legislation in Switzerland is a much different exercise than in the European Union, but you can have a tokenized asset, it can be processed and exchanged through a smart contract, effectively replacing the CSD, whereas in the European Union, as I understand that, would not be possible.
Is there work at considering exploring this for the next, I don’t say MiCAR 2.0, I mean this is not going away.
So is the European Union considering this and how to deal with this? We are exploring things at a technical level.
And I think that is very important.
So I don’t want to engage on political discussions. These are complicated enough. I can only speak for myself as forming part of a technical level where we would be stupid if we were not studying what is happening in Switzerland.
And there are very good examples, I would say, how to deal with that.
Take, for example, also the role of blockchain as ensuring the integrity of documents.
I mean, we all know Fabian Schär from the University of Basel, and I had a couple of discussions with him over the last couple of years, and at a certain moment, we organized a few workshops.
He spoke on one of them on, for example, how Swiss universities can detect fake diplomas, which for me is a key issue because we’re working on European systems on detecting fake products also with a view to the digital product passport.
And there’s a very elegant system in place, whereas we take a little bit more time. It’s also one of our use cases, but for certain restrictions we have in Europe for existing regulation, it’s not that straightforward.
So Switzerland can meaningfully show new ideas and how use cases work.
Again, and that is what we also discussed before, and that’s not, of course, the fault of Switzerland, we are dealing in Europe with the necessity of combining the technical element with the political environment of having all these different players, and that makes it complex.
I mean, I’m regularly in Switzerland, I discuss that with my Swiss friends, and my Swiss friends tell me, I don’t know if that’s true that basically in Switzerland, the opposition is embedded in the government itself through the rules.
So basically we have a sort of consensus and we do that where we don’t have that in Europe. So in that sense, obviously it’s a more difficult environment to operate in. But there are thoughts and hopefully the political will move in that direction.
Ian:
Let’s cover just two more areas, maybe specifically around things in MiCAR. When you mentioned NFTs, not included really or not covered in MiCAR and now – I mean, beyond the use cases of art and things like that, which are interesting, of course, there are also financial use cases around unique tokens for certain things to be traded or held or used as collateral and so on.
Do you think that is something that will eventually be addressed and is there potential there?
Joachim:
I think there’s a big potential there, but everywhere. perhaps allow me with two preliminary remarks.
First, we are already now ourselves, massively using NFTs.
So we have a system that we developed over the last five years, which we call the anti-counterfeiting blockchain infrastructure.
That’s an open source infrastructure where we can onboard industry solutions to detect fake products.
And this is operational. We tested it. We are now developing the pilots. It’s there.
What it basically does is the moment that you produce something somewhere, you create a digital twin. And when the physical product takes the journey through the different countries into the EU until the end consumer.
The digital twin moves as well and the information exchange between the two is done through NFTs that basically include document where the key data is mentioned and the customs authorities and others get on a need to know basis so they cannot read everything.
The information, whether that’s an original product or not or what else you have to safeguard. So basically like a sort of COVID passport, it’s green or red, but you don’t know details.
That is something that is a massive use case.
We see also the use case, as you mentioned, we see that in the arts, we see that but also in the industry, in the luxury brands, for example, take the Metaverse where basically you can use your NFT to add a value layer on top of your physical product.
Again, here Swiss enterprises, but also others are leading in that when you have a car, when you have a watch, etc. Take that to your avatar and call the experience of that.
We have many of these use cases. NFTs are something very positive.
Second, preliminary remark is there’s a difference between criminal behavior and stupid behavior.
We can all discuss the broad apes, but at the end of the day, it’s not criminal. It is something where probably you and me would say, don’t invest in that or we don’t see the purpose. But if someone sees nice, mean, it’s not prohibited to invest in stupid things and lose money if you want to do that.
The question is really what could be NFTs that would primarily fall into the financial domain.
We thought when we were designing MiCAR that we should exclude it.
Not because we cannot think in the back of our head of some cases where that must be the case. But a regulation is not there to prohibit everything, especially when the market is very small.
Regulation should be there on meaningful market sizes when you have substantive risks.
We see in NFTs. we know the discussion with the famous recital that crept in on what that is.
That reminds me a little bit of stamp collection. So now it’s an open discussion that you had basically take a couple of stamps. Now let’s not consider the case that there a lot of identical stamps, but imagine you would only have one stamp of each type.
You put that in a collection, you put that in your album.
Does that have more value than the individual parts taken together out there? But there’s a lot of considerations in that.
I would not see the necessity for a regulator to really deal with these simple things.
I mean, we can of course discuss consumer protection. That is very important. There needs to be transparency. There needs to be basic information, et cetera.
But at the end of the day, when it goes beyond that, NFTs are not really something that are a massive harbour of fraud that needs to be addressed in my opinion. And therefore, I think for good reasons, they were out.
If I look at the uptake now that NFTs have where there is in part a financial element, but that could be ancillary.
I mean, that’s the same with the utility tokens. The utility token, of course, has a certain value element, but perhaps we should better talk about value and not really financial because that’s what Web3 is about.
If you take every type of token that somehow has value of financially percussions and you will make a problem out of that, we would be in a very bad world and that is certainly the last thing we want also with MiCAR.
Ian:
And now perhaps one of the more difficult topics or more controversial topics, maybe not controversial, but there are quite strict laws or provisions in MiCAR around reverse solicitation.
Can you talk a little bit about the thinking behind that, the practicalities of that and the implications of that because I think that’s maybe one thing that for companies wanting to do business, continue to do business in the European Union or in the future is very top of mind for them.
Joachim:
Look, I’ve seen the draft standards. I know a lot of discussions about that.
I had actually a lot of discussions on that earlier today. If you want me to explain the logic behind that, frankly, I can’t because I don’t understand it.
I mean, I have a certain understanding where it comes from, but let’s…
Let’s start looking perhaps again from the real economy perspective, which is mine, and also put that in context.
We have very strict rules in Europe, which we will probably strengthen to prevent any form of geo-blocking.
We think that geo-blocking should not prevent consumers, especially if I translate that into financial terms, retail investors, to have access to goods and services in other countries. That specifically applies to the European Union.
But I think you can make a case, especially in a digital domain, where you have a global internet, where you have a fantastically easy use, I always do, of a virtual network, where basically you have all the means there to prevent anyone seeing from where you are, and then get access to all sorts of websites or services and deal with that.
So that’s a reality, especially in digital markets.
Now I think we must distinguish, and there must be a line between that, I agree, between blatant abuse of the technical means with fraudulent intent.
So when I set up fake websites or when I directly target European consumers, especially inexperienced one with very strange ideas, there must be minimal requirements.
I completely agree to that. But to go as far as basically saying that everything that you do, if you post something on social media, if you make a road show, if you see a sports event somewhere in the world and there’s some advertising on crypto or whatever, that this needs to be prohibited, that goes way too far.
I mean, we should not treat consumers as utterly stupid.
And I think it’s a fundamental right to have access to services, even if your regulator doesn’t like it.
That includes, by the way, privacy coins very much.
So I think that there is an overkill in this regard because that doesn’t meet the reality of digital markets, especially if you the technology to disguise all of that.
Where is the realistic twist in these things?
So regulator would be well advised to minimize the impact on having very clear guidance on a few things that give really rise to big concerns and then find a way to deal with that also in a positive way.
Rather than just take the traditional approach of making a massive washing list of all things that can be seen as branding.
And then say that, okay, that’s reverse solicitation that we don’t have and this gets out.
This is, first of all, it’s bad as an overkill.
And second, it is meaningless because you can easily avoid that.
Ian:
So that’s one example of these standards and things that are being brought out. ESMA is still working.
Yes. We are now in Q4 of 2024. 2025 is around the corner.
How do you feel about the pace of things?
And of course, that is also consideration for listeners and viewers of the podcast and MiCAR, you know, some things are clear, maybe stablecoins are clear, other things less clear.
How is it going to develop and how can you expect to be operating and doing business in the next months?
Joachim:
I think, and that is…of course, is very easily said, but I still would like to say it.
I mean, your factual description is right.
We are at a moment where we have many, many more unresolved questions on the table than probably we had one year ago, because one year ago everyone was saying, okay, MiCAR is coming and it’s nice or not, but let’s see.
Now we get into the nitty gritty of the details, having to apply it, et cetera. And then all these questions emerge.
It should always be in the world that the dog wags with the tail and not the tail with the dog.
What we see at the moment is that the tail is wagging with the dog because from some part of the regulatory sphere, proposals are out on standards that go way beyond the basic idea of the MiCAR regulation.
Now the question is who is the dog here and who is the tail? In my opinion, the dog is always
the economy, it’s businesses, is citizens, it is the reality in which we live.
No one needs to apologize for being there, no one needs to apologize for trying to make a business case of that.
So, I think the legitimate expectation that people can have is if you are a business, that you are proactive in identifying certain risks that might emerge from that and propose a solution.
That is what I would like to see.
In terms of things on which you complain. But then it is completely legitimate and I think also required from businesses to be assertive and saying that if this is the problem, if you don’t solve it or give me a practical answer, this is what I propose working around this and this is to the best of my knowledge what I should do.
That is actually the idea behind the reversal of proof on utility tokens in the starting part of the MiCAR regulation that we talked about.
Reversing the burden of proof means that “the dog” is the issuer of the token and only in very well-defined negative cases you can be prevented from doing so and it’s basically the same here.
I think that we have a very unhealthy focus now by everyone on a couple of standards and there are many from them also on sustainability and other things where I think that goes very, far to put it mildly, but that cannot be the last word.
The last word needs to be a democratic dialogue by everyone involved to improve things and not by a technical element within a chain of command, to put it like that, to determine what the market has to do.
That would not be democratic.
So businesses should still be very vocal and very active. vocal, self-organize yourself, get together.
I observe that more and more.
Bring your proposals, educate the regulator, make clear why you’re doing certain things, show at best example somewhere.
If nothing works, consider dealing with other people, but work first and foremost in part of the world, in your regulation where you are located within the you are outside and try to make the best out of it.
My experience is that the largest part of regulators are actually positive people that can be convinced, but you have to understand that they have their own line of thinking.
They have their own language. They have a certain mandate. Their mandate is not to make you happy.
Their mandate is basically to apply rules that they get from hierarchy.
And if you accept these basics, then if you engage, think that in a lot of examples, not every example, you can improve the situation.
Ian:
And obviously there are many companies preparing for MiCAR in various countries, Liechtenstein, France, Germany, all around. Quite a few CASPs who have been active up until now, got national registration.
Now MiCAR is coming.
Would you have any idea kind of generally how many legacy CASPs there are now going to be in the first wave of MiCAR?
Joachim:
That’s an interesting, interesting question.
I mean, what I would say is we are probably seeing a curve.
I mean, I might be wrong on that. just my perception, but probably when we look at now the first part of MiCAR that is now applicable – we see perhaps, and I don’t have the full overview, less applications and less licenses than we might have hoped for.
But we see an evolution towards, in some areas, now increasing interest and also an increasing number in licenses, for example, on euro-denominated stablecoins than we might have thought before.
So in a way, that reflects in what we discussed before. There was a wishful thinking world before the application of MiCAR.
Then there was a shock element that, always with regulators, when you want to do certain things and it’s not really 100 % clear, it takes longer than you think.
But now perhaps comes a sort of normality that now that this is there, people accept realities and work around that or work with it and you get more.
So in that sense, I cannot, of course, give you a very clear number, but I think that after the first disappointment of the numbers, I think that now there are more than I actually expected we’re getting there.
Ian:
Okay.
And maybe just last question as we look forward into the future.
I mean, obviously this is a big exercise to bring this legislation and then apply it across countries.
We have heard also from different guests on the podcast. There are still various levels of understanding among national regulators.
How long do you think it will be until there is a harmonization of understanding and then application within different countries?
Joachim:
In my opinion, what we observe is a very well-known anthropological fact that this is a question of time due to basically generational issues.
I mean, that is not exclusive to crypto.
We’ve seen that 30, 40 years ago with the collapse of the Soviet Union and satellite countries and the question of how to get market economy in these countries.
And I’m not discussing the question of whether it was sensible or not.
I’m just saying it was just the fact at the time that people were trying to re-educate people in the eastern countries.
And I was involved in that at the time and we tried everything and it didn’t work out.
Why doesn’t it work out? And that is very well known from institutional theory and from a lot of, I would say, research.
Basically people have their value systems, they have their belief and you just do not go there with a few facts and convince people that have their whole life held a specific belief system.
What happens is that old people die and young people come in.
And this the effect that we observing now. We now have a new European Parliament. I’m not saying that they are through DNA more intelligent than the previous one, but they are on average five years younger.
They know more about the digital economy.
They have themselves more experience with things that we are discussing. In the regulatory offices, it’s exactly the same.
You have very big ones, where the hierarchy is usually relatively old where have young people that know how to do stuff, but they are intimidated by the hierarchy or don’t know how to organize or whatever.
So that is a tanker that is difficult to change course.
You have the smaller ones that are normally more open and innovative, at least some of them, but that are not really with that much leveraging power in the international discussions.
But there again, it is a question of time on how that creeps in. At a certain moment in time, we have a young generation, we have 4 billion gamers worldwide.
They all live with digital tools with metaverse, with crypto, with tokens, they know that much better than we do instinctively of what there is.
At a certain moment, they will have the power to decide in their various environments and we will have all of what we’re dreaming of now will be a reality in 20 years.
The only little question, Ian, what do we do these 20 years? We have a process going there. We can make that process difficult. We can make that process a little bit more easy.
But at the end of the day, we are all dinosaurs staring at the meteor and saying, what a nice meteor and how nice life is and boom, at a certain moment we will be gone.
That’s what it is. So I think for me, that’s a very positive end note. I don’t know about you or anyone out there, but I think time is playing massively in our advantage.
And that’s something that I always also say to investors.
I mean, I know how hard the business is, but at the end of the day, if you want to stay in business, it is not about being the fastest swimmer. It is about being the last man to drown.
And if we can do that, then time plays for your advantage.
So stay in business, find your niche, do your stuff.
You will not be happy with everything, but as long as you’re in there, go with the flow. think that really time is very much bringing forward an even more massive momentum on crypto innovation.
Ian:
That’s a very, very interesting way to finish up. Very, very insightful. Thank you very much, Dr. Joachim Schwerin for joining RULEMATCH Spot On. Your insights have been very valuable.
Perhaps we’ll have you back again in five years if we have the chance to have this conversation again, evaluate MiCAR and some of the effects, wait and see.
Joachim:
Thank you so much for hosting me and I take you by the word because I think that everyone who is making prediction should eat his words.
So I’ll be very happy to look back in the world in five years and explain you precisely of why it has turned out completely differently, but I knew already why.
Ian:
Very good. Thank you very much.
Joachim:
Thank you very much.