As ECB head calls for crypto lending regulatory framework, this integration could be the key to growing popular trust in blockchain technology
Amid a period of volatility and reassessment for cryptocurrencies, the president of the European Central Bank Christine Lagarde recently branded crypto assets and decentralised finance (DeFi) as potential threats to financial stability.
Lagarde is famously a crypto sceptic, but she’s now stated her belief that crypto lending and staking should be regulated through a dedicated framework, including an identifiable issuer.
Read also this FintechZoom article Crypto need to be regulated? In past 5 days Bitcoin Price increased +9.59%.
The main concern at play is that crypto assets, markets and services, as well as their interconnection with traditional financings, will pose a risk to financial stability. This comes as no surprise, as just a month prior the ECB had warned that crypto’s “deepening ties to banks and asset managers” posed a threat to financial stability, as “a deep dive into cryptoasset leverage and crypto lending (…) found evidence that these activities were becoming more risky, complex and interconnected with traditional institutions.” This followed another ECB executive, Fabio Panetta, also calling for a clampdown on the sector in order to avoid a “lawless frenzy of risk-taking.”
Lagarde’s recent comments, then, are in line with other lawmakers and regulators calling for a more controlled and secure environment for investors ––starting with demanding for an identifiable issuer.
The latest update came on June 30th, as the European Parliament, European Commission and European Council reached an agreement on a major regulatory package aimed at protecting consumers, which will see cryptocurrency companies needing “a licence and customer safeguards in order to issue and sell digital tokens within the European Union”. Contrary to Lagarde’s total rejection of cryptocurrencies, though, a proposed amendment to ban proof-of-work crypto mining (the algorithm used by the Bitcoin network, which would mean a ban on Bitcoin in the region) on sustainability grounds was ultimately rejected by her colleagues.
The agreement, known as the European Union Regulation on Markets in Crypto Assets, or MiCA, pursues main objectives such as legal certainty, support for innovation, consumer and investor protection and market integrity, and financial stability.
But during a testimony before the European Parliament, Lagarde coined the term “MiCA II” to refer to a possible second package that “should regulate the activities of crypto-asset staking and lending.”
Lagarde is absolutely right in saying that the current MiCA I package does not address staking on decentralized systems and decentralized lending, nor issuance of crypto assets where there is a decentralized issuer, which is the case for Bitcoin. Such additional regulatory clarity would also be in the interests of enterprise and institutional stakeholders, as current MiCA I regulations appears to leave people somewhat in a limbo: by leaving decentralised products unregulated while subjecting the products’ users to regulation, they might make users responsible for understanding when they de facto need a licence.
Upon closer look, it’s also difficult to understand why a decentralised product and the use of its smart contracts, coded by physical individuals and used by physical individuals, should be unregulated by definition, while on the other hand centralised products would be regulated under the suggested MiCA I directives.
As for DeFi, which she suggests should be covered by the separate regulatory framework (MiCA II), growing interest will demand new products and services that incorporate regulation to support the regulators’ concern for consumer protection, as well as decentralised finance’s real risk to financial stability.
Lagarde is also, understandably, concerned about the lack of speed in the implementation of regulation, as MiCA I will not come into effect before 2024. Nevertheless, the package is the first step by EU regulators to collectively tackle crypto concerns, as up until now each individual member state was left to manage regulations of their own accord.
In the first quarter of 2022, for example, Germany claimed the world’s spot of “most crypto-friendly country,” backed up by its zero-tax policy on long-term capital gains from crypto, and the fact that it homes Northern Data, which is the European Union’s largest mining company and is powered almost entirely by renewable energy.
As individual countries operate in different ways and spheres, shared regulations have become inevitable and expected. But while the popularity and usage of blockchain technology and cryptocurrencies has skyrocketed everywhere, there is still a long way to go before they see a mass migration from Web2 to Web3.
At Concordium, a science-based proof-of-stake blockchain created with business applications in mind, we believe that combining a layer-1 blockchain with the ID framework built into the protocol might be the key to unlocking such a far-reaching move.
By delivering a user-friendly platform where all users have an ID and all transactions eventually can be linked to an ID, we have solved the issues that anonymous transactions give and are providing banks, regulators and businesses with a blockchain you can use and trust.
Blockchain technology is one of the most important innovations in recent times, and crypto companies should aim to contribute to its future by being compliant ––by design.
Written by Lone Fønss Schrøder, CEO of Concordium and Vice Chairman of the Board at Volvo, Ingka and Ikano Bank.
