Europe’s Crypto Regulation: A Deep Dive with Peter Kerstens
The Debate Over MiCAR 2
Peter Kerstens, the mind behind Europe’s MiCA crypto regulations, is skeptical concerning the need for a MiCAR 2. He believes the European Central Bank is more longing for it than mandatory. Regulating decentralized finance, or DeFi, is not any small feat. Short of a ban—which Kerstens firmly opposes in any democratic context—he finds it a difficult area to navigate. He also identified that U.S. banking regulators were the driving force behind the Basel banking rules, which have to this point restricted banks’ involvement in permissionless blockchains. His insights were shared during a chat on the EY Blockchain Summit.
Unpacking MiCAR’s Future Plans
MiCAR has a built-in requirement for a report back to be submitted 18 months after its implementation. This report will address DeFi, crypto lending and borrowing, NFTs, and services related to certain stablecoins. During his presentation, it became apparent that Kerstens himself shall be penning this report.
Understanding the Core of Regulation
Most regulations spring from an issue, but not every issue is fixable through regulation. Kerstens discussed DeFi, noting that while most of it employs decentralized technologies, many still involve counterparties, making them not entirely decentralized. However, he acknowledged that true decentralization—without human intermediaries—is feasible, albeit area of interest. “If there’s no problem, there’s no need for a solution,” he stated, questioning the regulatory approach to non-entities unless it’s about imposing bans, which he believes are reserved for authoritarian states.
The Tokenization Horizon
Although he’s not dismissive of cryptocurrency, Kerstens identified the relatively minor market cap of digital assets in comparison with other asset classes. Hence, he views MiCAR as somewhat of a “sideshow” because it focuses on non-financial instruments. His vision for blockchain is centered on tokenization via permissionless ledgers, but there are pieces still missing on this puzzle.
The first step is getting each buyers and sellers ready to have interaction in tokenization, which is not any easy task for traditional players focused on the underside line and searching for quick, transformative gains. The second piece involves infrastructure. Kerstens emphasized the necessity to embrace permissionless blockchains and critiqued the notion of regulation being technology-neutral. He noted regulations often mirror the state of technology on the time they’re drafted. Initiatives just like the EU’s DLT Pilot Regime and the UK’s Digital Securities Sandbox are exploring mandatory changes.
The Basel Committee’s Impact on Banks
One hurdle for permissionless blockchains is the Basel Committee’s stringent rules on crypto-assets for banks. These rules categorize crypto as high-risk, making it difficult for banks to carry significant amounts on their balance sheets. Tokenized securities on permissionless blockchains are treated similarly. In contrast, digital securities on permissioned blockchains enjoy more favorable treatment.
Kerstens attributed this to U.S. banking regulators who, he claimed, intentionally made these rules stringent to dissuade banks from entering the crypto space. He speculated whether the U.S. administration might change its stance or leave things unchanged, assuming Europeans will comply while the U.S. charts a special course.
Further, Kerstens highlighted the need for central banks to simply accept tokenized assets as collateral—a subject generating much discussion inside the EU. He also identified the necessity to handle private law issues, reminiscent of asset transfer on a blockchain, which varies across European countries.
Envisioning a Blockchain-Centric Future
Finally, Kerstens encouraged his audience to assume a world where today’s legacy capital market infrastructure didn’t exist. Would we go for disconnected systems requiring reconciliation? He firmly believes that in such a scenario, blockchain can be the foundational structure, describing it as “an accounting system on steroids.”
Image Credit: www.ledgerinsights.com
