Last week, the European Parliamentary Research Service (EPRS) released its study ‘Emerging risks in crypto-assets’, focusing on the financial services’ regulatory and supervisory challenges. It noted the level of interest from consumers and investors, the cross border nature of the assets, which means there are potential jurisdiction issues, and the fact that there’s often a lack of an accountable entity. The combination means it’s comparatively tricky to regulate. As part of its assessment, it simulated the economic impact of crypto-assets over ten years as between €705 – €760 billion ($830-$895 bn), depending on legislation.
A leaked version of the EU’s legislative proposal on crypto-assets (MiCA) was released just last week.
In this study, the EPRS looked into the economic benefits and associated risks of crypto-assets. As with MiCA, the reasoning behind the research is due to crypto-assets’ complex and unregulated landscape. That may hinder the potential for business growth, technological innovation and expose consumers and investors to substantial risks.
The policy areas
The study focuses on three specific policy areas in the crypto-assets market that are ‘pivotal to the future development of crypto-assets and digital finance in Europe.’ The first of these is defining a common framework. Due to their ‘hybrid and transformative nature’ and the pace in which they develop, it’s particularly challenging to classify crypto-assets. The paper grouped crypto-assets into those that fall within current legislation, those that are outside the scope at present, and stablecoins.
The second policy area is cyber-resilience. In this, the EPRS compared the traditional centralized systems to decentralized ledger technology (DLT). Some would argue that DLT is inherently more secure and cyber-resilient. Nevertheless, there are risks of cyberattacks, especially through service providers and other technical failures.
The third area is the need for a data strategy. The EPRS expresses concern that without a central regulator, DLT users can collect and distribute data amongst themselves, ‘resulting in some profound issues regarding rights of access and privacy.’ Apart from GDPR, there’s the need to harmonize digital identities across member states. And the potential for better digital finance reporting.
Impact on crypto-market actors
Actors in the crypto-market are predicted to benefit from the proposed legislation. For businesses, there would be increased efficiency, integrity, safety, and lower transaction costs. For investors, crypto-assets’ current feature of volatility would be alleviated, bringing increased market certainty and clarity. While consumers already benefit from high efficiency and low financial services costs, the EPRS adds they could benefit from increased cyber resilience and decreased financial exclusion with legislation. For governments, legislation would make it easier to enforce anti-money laundering/counter-terrorism financing provisions. And lastly, asset digitalization could benefit the economy overall.
According to their simulation, EPRS estimates that the European financial sector’s potential added value from crypto-assets could reach €705 billion ($830 bn) if there’s no additional EU level regulation. The figure could be up to €760 billion ($895 bn) if the EU implements new laws. This in turn, has all sorts of effects on the economy. That includes a potential rise in employment and increase productivity, amongst others.
Introducing legislation could turn out to be a good thing. It will create legal certainty for consumers and issuers of capital-assets, who currently have to jump through hoops to ensure they comply with the various regulations of EU Member States. On the other hand, one could argue that legislation defeats the whole purpose of DLT, which was created to eliminate the role of central authorities, including regulators. Either way, the EU is seemingly set on regulation. In this study, the EPRS confirms it’s necessary to categorize crypto-assets and to establish a regulatory framework for markets in crypto-assets if their benefits are to be realized.
Reuters recently reported the EU has plans to introduce a comprehensive crypto-assets regime by 2024, allowing for quicker and cheaper cross-border blockchain transactions. This is to encourage financial digitalization, especially amid the COVID-19 crisis.