MiCAR Architect: no need for MiCAR 2; US promoted Basel crypto charges – Ledger Insights #CriptoNews

Peter Kerstens, the original European Commission architect of Europe’s MiCA regulations for cryptocurrency, said he doesn’t see the need for MiCAR 2, and it’s mainly the European Central Bank that wants it. He believes that regulating decentralized finance (DeFi) would be tricky, short of a ban, which he would never advocate in a democracy. He also pointed the finger at US banking regulators as the instigators of the Basel banking rules that have limited the involvement of banks in permissionless blockchains to date. Mr Kerstens was talking during the EY Blockchain Summit.

MiCAR included a clause that required a report to be delivered 18 months after the regulations came into force. It is meant to cover decentralized finance (DeFi), crypto borrowing and lending, NFTs, and certain stablecoin related services. It became clear during his talk that Mr Kerstens is tasked with writing the report.

Most regulations start with a problem. But not every problem can be solved with regulation. Mr Kerstens discussed decentralized finance, noting that the vast majority of DeFi uses decentralized technologies but has counterparties, and hence is not truly decentralized. But true decentralization, without human counterparties, is possible. “It’s fairly niche, but it exists,” he observed.

“If it’s not a problem, it doesn’t require an answer. And if it were a problem, why would regulation be the answer to it? Because if you think about it, any regulation you may be familiar with always has what we call a personal scope – the people that have to comply with it, the entities.”

He continued, “My mind is not big enough to imagine a regulatory doctrine that you can apply to non-persons, to non-entities. Unless it’s a ban.” And he believes that’s only appropriate in totalitarian regimes.

The future of tokenization

While he wasn’t dismissive of cryptocurrency, he noted the relatively small market capitalization of digital assets compared to other asset classes and hence MiCAR “is a bit of a sideshow” because of its focus on non financial instruments. Most tokenization falls into capital markets regulations such as MiFID. His vision for blockchain is tokenization on permissionless ledgers. But there are a few missing pieces.

The first requirement is for the buy and sell side to be ready to engage in tokenization and for the market to develop. While he quickly moved onto the other points, we’d observe this first step is very non trivial for incumbents who are constantly watching the bottom line and looking for quick 10X wins.

Second is the infrastructure. Mr Kerstens was talking about the willingness to use permissionless blockchains. Refreshingly, he dismissed the idea that most regulation is technology neutral, noting that it’s always a reflection of the state of technology at the moment the legislation is drafted. “It is impossible to comply if you use a different technology stack,” he observed. Initiatives such as the EU’s DLT Pilot Regime and the UK’s Digital Securities Sandbox are aiming to figure out what changes are needed.

Basel Committee crypto-asset rules for banks

One of the blockers with permissionless blockchains is the Basel Committee rules on crypto-assets for banks. Crypto is treated as high risk, making it prohibitive for a bank to hold any sizable amount on its balance sheet. Tokenized securities issued on a permissionless blockchain are classed in the same bucket as crypto for now. By contrast, digital securities on a permissioned blockchain have a favorable treatment.

We owe “this entirely to the US banking regulators. They hiked them up so much because they did not want to get banks involved in (the) crypto space,” he said. “Even though the US never had any intention of applying this, but that was to discourage the Europeans.”

He mulled whether things might change with the new US administration or whether their view might be, leave it as is because “These dumb Europeans will comply with them and we’ll just do something else.”

Thirdly, Mr Kerstens noted another required step for tokenization as the need for central banks to accept tokenized assets as collateral, an issue that’s being discussed quite a bit in the EU.

His fourth point was the need to resolve private law issues such as the transfer of an asset on a blockchain. That applies to each European country.

Finally, he asked the audience to step back and envision what if we didn’t have the current legacy capital market infrastructure and had the choice of starting with a clean sheet. Would we adopt siloed systems that need to be reconciled?

“I am absolutely convinced that it would be built around blockchain,” he concluded, adding that “blockchain is really an accounting system on steroids.”