The European Union and the United States : A common regulation on digital assets?

Is it realistic to have common standards with differing interests and approaches ?

Cryptoassets are a true revolution. Payment is made much easier when intermediaries are removed. Such innovations open the door to new economic perspectives, especially through NFT (Newsletter on non-fungible tokens)

Banking and financial institutions and companies will not go unaffected. In fact, they feel challenged and are pushing to reinforce the regulation of these new assets. The challenges they pose are many, including their volatility, fraudulent use and environmental footprint (Newsletter on blockchain's environment footprint). 

In short, two major regulation plans are at play. On one hand, the European Union emphasizes consumer protection, and on the other hand, the United States prioritizes innovation. The discussions surrounding these regulations are heavy; the laws in question promise real change in the ecosystem. The relationship between consumer protection and the competitiveness of the cryptoassets sector is also tense. 

Certain European Union leaders, like European Commissioner, Mairead McGuinness, have proposed that the EU and the United States should develop a portfolio of common responsibilities pertaining to the regulation of cryptocurrencies. But is this proposition viable? What constraints would be placed on both parties? Given the fact that the market is dominated by American players, how can the European ecosystem be protected? 

Faustine Fleuret, President and CEO of the Association pour le développement des actifs numériques (ADAN), Lee Reiners, Executive Director of the Duke Global Financial Markets Center, and Hubert de Vauplane, lawyer and leader of the FinTech team at Kramer Levin LLP (Paris) will shed light on these questions. Watch the webcast on the regulation of crypto-currencies. 

1. Different stages of reflection 

To coordinate these approaches, Commissioner Mairead McGuinness's proposal highlights four prerequisites:  

  • no product should be unregulated;
  • supervisory authorities should gather and exchange information on a global scale;
  • all agreements must be protected by retail investors;
  • the cryptocurrency ecosystem should integrate environmental considerations entirely.

Mairead McGuinness, COMMISSIONER , Financial services, financial stability and Capital Markets Union
 

These two powers also need to share these principles. Today, we see how vastly regulation projects vary between the United States and the European Union, including that they don't protect the same interests. 

"In theory, it would be preferable to have a unique and global regulation, but I think that's still too far away, given the differing approaches and definitions." ‒ Hubert de Vauplane

The EU is one of the first large jurisdictions to propose a complete regulation of cryptocurrencies : from risks posed to financial stability to consumer protection. The rules regarding money laundering are also addressed. Moreover, the French Presidency of the Council of the European Union has demonstrated his willingness to act quickly on this topic. As of June 2021, the Governor of the Banque de France, François Villeroy de Galhau, advocated for Europe to quickly implement a regulatory framework around digital currencies and cryptoassets in order to avoid the role of the euro being diminished on the international stage. The two laws should be in effect by the end of the year. 

In the United States, President Joe Biden asked his administration to analyze the proposed issuance of a digital dollar through an executive order published on March 9, demonstrating a willingness to regulate this topic at the federal level. That said, the scope of the text cannot be compared to European regulations given that it is nonbinding and does not clearly express which agency should take responsibility of the issue. As such, several organizations (e.g., FED, SEC, FTC) are competing to be the titular authority on the regulation. To mitigate the competition, Lee Reiners says that it would be necessary for Congress to coordinate the process. 

Upon reflection, it is difficult to compare the European and American goals in terms of the regulation of cryptoassets. 

2. The definitions differ

Hubert de Vauplane points out that the definition of "securities" differs vastly from the definition used in Europe. For example, in the European Union, derivatives are regulated in the same way as financial investments, unlike in the United States. To this day, platforms like Kraken or Binance are not recognized as investment platforms in the United States. 

Moreover, in the European Union, the application of the notion of consumer protection varies based on the area to which it applies, especially whether or not it consists of a financial activity. In fact, the qualification of the good or service as a digital asset has a direct impact on the application and boundaries of the principle. Next, it must be determined whether or not it makes sense to duplicate the financial services model’s consumer protection system for all digital assets without distinction.

"Not all cryptoassets can be assimilated to financial assets. [...] We need to ensure that the scope of MiCA does not include use cases that have nothing to do with financial regulation."   ‒ Faustine Fleuret

3. Not all industry actors have the same impact, nor do they act in the same way

The cryptoassets market exists in large part on American and Asian platforms. In Europe, the ecosystem is mainly represented by start-ups.   

Top 10 cryptocurrency exchange platforms in 2022

In terms of regulating digital activity, the "same activity, same risk, same rules" methodology has been defended for a few years. The risk of blocking or slowing activity for newcomers associated with this methodology was especially addressed during the implementation of the General Data Protection Regulation (GDPR). The same concern is raised as the regulatory sandbox, which several newcomers might benefit from, is implemented.  

Hubert de Vauplane highlights that "newer entities do not have the same lobbying influence as big actors." The biggest actors have an undeniable influence.

The approach used in the United States seems to be the most flexible vis-à-vis certain actors and subjects. For example, Stablecoins are subject to more lax regulations than other assets. 

4. Even if there are common standards, how can the application be guaranteed? 

Digital is a whole new world in which actors have exceptional power and global influence. If it is not regulated with respect to the economic challenges posed to the companies involved, the rules will not be implemented efficiently. As such, significant human, technical and financial resources are required. 

Guaranteeing the implementation of rules at the European level is already quite complex. This question was also raised in the context of the Digital Services Act (DSA) and the Digital Markets Act (DMA). To ensure consistent application, the two powers would need to invest the same resources to curb fraud and guarantee compliance with the norms. 

Moreover, in the United States, we see stark contrast across states. Some states, like New York, have a reputation for being strict: in 2015, BitLicense was developed ‒ a business license for digital currency activities. Others, like Wyoming, implemented laws that favour the cryptocurrency sector. Given the context, how can we guarantee that a federal law will be applied consistently across the country?

5. Finally, is it even desirable?

In principle, developing a coordinated approach to global actors would be favourable. However, a global approach to cryptoassets doesn't seem viable considering how varied the ongoing efforts are. The Bank for International Settlements (BIS) is seeking to develop coordinated thinking on certain topics that seem more suitable. For example, the BIS published a report on October 6, 2021 destined for regulatory authorities. 

Moreover, the United States and the European Union are not alone in the cryptocurrency race. Other countries, such as the United Arab Emirates, are developing favourable regulations to attract cryptocurrency industry capital; the country’s first regulations for the digital assets sector were established in 2018. On March 9, 2022, Dubai adopted a new law to create the Dubai Virtual Assets Regulatory Authority (VARA), a regulatory and licensing authority. Over the last few months, the largest cryptocurrency platforms in terms of trade volume (e.g., Binance, FTX and Kraken) moved into the Gulf. How can we define global standards while accounting for such actors that have established themselves as a cryptoassets hub? 

Dubaï

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