‘No point’ to EU crypto rules unless world follows suit, official says

DAVOS, Switzerland – New EU encryption rules are meaningless unless the rest of the world follows suit, the bloc’s top financial services official told CoinDesk at the World Economic Forum on Thursday.

EU Commissioner Mairead McGuinness said the turmoil in the crypto market has given extra ammunition to those pushing for a global rulebook, but warned that future crypto innovations must be focused on people.

“It’s great that we can say that” the EU is the first major jurisdiction in the world to regulate the sector with its landmark Markets in Crypto Assets Regulation (MiCA), McGuinness told CoinDesk on the sidelines of the meeting in Davos. “But there is no point in Europe standing alone, because this is a global development, and we cannot put obstacles in it.

“If we fail to do the global approach, we’re going to find that there are more and more problems,” McGuinness said. “Technology is limitless.”

The seeds of a likely global cryptoregulatory framework have already been set by the Financial Stability Board, an international group that makes recommendations on the global financial system. Klaas Knot, chairman of the board, told an audience in Davos that he wants to finalize controversial proposals before the summer. But McGuinness was frank about the practical challenges of implementing international rules.

“I hope it is” global crypto regulation, she said. “But you know, when it comes to climate change, we all want global things to happen, and they’re not, so sometimes somebody has to start the process.”

MiCA, to be formally approved by the European Parliament in April, sets reserve requirements for stablecoins – cryptocurrencies typically pegged to the US dollar – and governance rules for crypto companies. The fear is that MiCA will be undermined if exchanges or digital wallet providers try to serve EU customers from regulatory havens, which McGuinness referred to as “sunny places for shady people” – something European regulator and head of the Financial Stability Board, Klaas Knot, had said earlier during a panel about finding the right balance for crypto.

The struggles of 2022 when many major crypto firms collapsed, including Bahamas-based crypto exchange FTX, stablecoin issuer Terraform Labs and lenders Voyager Digital and Celsius Network, could help McGuinness in her quest.

“We are now, I think, in a good place because we have seen very visible examples of how things can go wrong,” she said. “I think the world now knows that if it happened there, it can happen anywhere, so let’s talk.”

FTX founder and former CEO Sam Bankman-Fried now faces multiple criminal charges in the US, including conspiracy to commit wire fraud and money laundering, to which he has pleaded not guilty. But McGuinness maintains that regulation is necessary even for less serious cases.

Some people got involved in crypto because of their mistrust of the establishment and the excitement around technology, and “it just went to their head and got out of control, and then there are casualties from that,” she said.

“It’s still, I think, an unfinished debate as to what the problem is, or is it a problem with crypto inherently?” she said. “People with the best intentions can make business mistakes, and crypto people can make big business mistakes that then affect individuals, or further down the financial system.”

Even when MiCA comes into effect around the start of 2025, it will not be the end of the story. Crypto is evolving quickly and “we need to adjust what’s in place,” McGuinness said, but she also cautioned against rushing to regulate areas like decentralized finance (DeFi) that aren’t well understood yet.

“We have to get our heads around all of this,” she said. “DeFi – you ask the man or woman on the street what this is and they don’t really know, so we have to be very careful that we don’t get ahead of ourselves.”

One option is to “have places or sandboxes where we can test things before we make it freely available, and decide based on the test whether it’s going to work or not,” she said, citing an approach the EU has taken in the experiment. with distributed ledger technology-based securities trading.

Meanwhile, crypto providers also need to remember what they are trying to achieve and who they are serving, she said.

“Sometimes you forget when you talk about technology, this is ultimately about European citizens … they want service,” she said. “We may see backlash against this over tension around the development of finance.”

As examples of setbacks, she cited lawmakers’ frustration with closing bank branches and ATMs, and her own personal — but relatable — frustration with waiting on hold for 45 minutes with a financial services provider.

“If I was in the financial system, I would think, how do we avoid that disconnect from our customers?” she said. “This excitement around technology is wonderful … but don’t underestimate that it has to be human-centered.”

Update (January 19, 2023, 19:07 UTC): Clarifying Commissioner McGuinness refers to a statement by finance chairman Klaas Knot about “sunny places for shady people” in paragraph seven.