Dear friends, dear interested,
Europe is finally moving forward with the regulation of crypto-assets. This is to introduce binding rules for existing cryptocurrencies such as Bitcoin and Ethereum and to create a framework for innovative financial services based on blockchain. After the EU Commission presented a legislative proposal for Markets in Crypto-Assets (MiCA) last autumn, the amendments of the political groups were now submitted to the European Parliament’s Committee on Economic and Monetary Affairs. I am working on the draft legislation as lead MEP (“shadow rapporteur”) for the Greens/EFA group.
MiCA sets rules for the issuance of crypto-assets as well as the provision of services related to crypto-assets. For crypto-assets, MiCA distinguishes between two types of stablecoins, which replicate the value of other instruments, and other crypto-assets. The strictest requirements are envisaged for the so-called e-money tokens, which are supposed to replicate the value of a currency 1:1. Facebook’s planned digital currency Diem is expected to fall into this category. In particular, such crypto-assets will have to meet the same requirements as e-money, such as PayPal. Another stablecoin category comprises crypto-assets that relate to a basket of currencies, commodities or other crypto-assets. This is where Facebook’s originally planned digital currency Libra would fit in. The issuance of such stablecoins will be subject to authorisation. The issuance of other crypto-assets will have to be notified and must be accompanied by the publication of a standardised information document for which the issuer can be held liable. Crypto-assets that represent classic financial instruments (such as shares or bonds) in tokenised form do not fall under MiCA, but the relevant existing laws. The provision of crypto services will also be subject to authorisation under MiCA. In particular, this concerns the buying and selling of crypto-assets, their custody and the operation of crypto exchanges.
The distributed ledger technology underlying crypto-assets offers opportunities for new providers to challenge the established financial sector with innovative offers. It is a positive step that the EU Commission’s proposal will establish a reliable legal framework for this in the future. The fact that large private stablecoin projects such as Facebook’s Diem are to be subject to strict conditions is very welcome. A weakness of the Commission’s proposal is that it focuses too much on these future markets and pays too little attention to the current crypto markets with their many problems. This applies in particular to the criminal use of cryptocurrencies, their sometimes considerable ecological footprint and the frequent lack of accountability. For me, it is crucial that there is no special treatment of crypto assets and that comparable activities are also subject to comparable rules. Only in this way can there be fair, technology-neutral competition. It is also crucial that no player can avoid the rules. I would therefore like to outline the changes in the legal text that I have proposed as shadow rapporteur.
Ensure uniform European supervision
Crypto-assets and the related services are digital by nature and not limited by national borders. This makes them promising instruments for the European Capital Markets Union, i.e. the convergence of European capital markets and the strengthening of cross-border investments. In the past, this has often failed due to the inconsistent application of rules in the individual member states. We must not repeat this mistake with crypto-assets. The Commission’s draft unfortunately envisages that crypto-assets (with the exception of particularly large stablecoins) and crypto-service providers will be licensed and supervised solely by national supervisory authorities. The European authorities for market and banking supervision, ESMA and EBA, would have largely horizontal functions. This envisaged establishment of 27 new authorities would not only be inefficient, there is also the danger that not all of these supervisors know what they are doing faced with new technological developments. Moreover, lax supervisory practice may become again an instrument to attract business. I have therefore proposed instead to make ESMA the single European supervisor of all crypto-services and most crypto-assets. In addition, ESMA should submit regular reports on the European and global crypto markets and the legal and illicit use of crypto-assets. For certain crypto-assets with a predominant payment purpose, the EBA is to act as the supervisory authority. Only for e-money tokens should national authorities retain a stronger role. I will also advocate for stronger European supervision in the upcoming revision of the E-Money Directive.
Rendering the criminal use of crypto-assets more difficult
Cryptocurrencies are now a key tool for cybercriminals. Illegal trading platforms on the darknet or ransomware attacks rely almost entirely on cryptocurrencies. These forms of crime could not exist at their current scale without cryptocurrencies. The fact that financial crime is also committed on a large scale with normal money does not justify a lax treatment of cryptocurrencies. Most cryptocurrencies, such as Bitcoin, do allow for the tracing of payments thanks to their public ledgers. However, law enforcement agencies can only use this if at some point the identity of the criminals has been linked to the otherwise pseudonymous cryptocurrency addresses. Today, this usually only succeeds if the criminals make a mistake. From a rule of law perspective, we cannot be satisfied with this. For normal money, after many bad experiences, we have made the traceability of beneficial owners for the purposes of prosecution and taxation the standard. With cryptocurrencies, law enforcement reaches a dead end at the latest when transactions are processed by non-cooperative trading platforms. The problem is too acute to wait for the next revision of European anti money laundering laws, as proposed by the EU Commission. Moreover, there is no need for general requirements, but rather specific rules tailored to crypto-assets. I have therefore inter alia proposed the following changes to MiCA:
- All crypto service providers, especially exchanges and custodians, must establish processes to prevent money laundering and terrorist financing and consistently establish the identity of their customers. Special due diligence obligations apply when funds originate from so-called “unhosted wallets”, i.e. cryptocurrency addresses managed by the customers themselves.
- Crypto service providers are not allowed to offer services regarding so-called privacy coins (such as Monero), which disguise payments through anonymisation techniques and thus make tracking more difficult. In particular, these crypto-assets may not be offered for sale or admitted to trading.
- ESMA is to maintain a list of international providers who do not implement money laundering and tax regulations adequately and do not cooperate with law enforcement authorities. Transactions with such providers and other business with them are prohibited for crypto service providers. This measure also creates strong incentives against unfair competition in third countries.
Improve the ecological footprint
Many existing cryptocurrencies have a significant environmental footprint. Their mining wastes huge amounts of electricity on the solving of computational puzzles, and loads of e-waste are created with each new generation of hardware. Bitcoin alone is estimated to consume as much electricity as the entire Netherlands today. That is more than half of the total electricity consumption of all data centres worldwide. There has been an upward trend for years now. And as long as the price keeps rising, the remuneration of miners sets incentives for further increases. For all the merits of the technology, this is disproportionate. Yet alternatives to resource-intensive mining are available that could drastically reduce the ecological footprint. My proposal is therefore to successively demand minimum energy standards for crypto assets – just as we have been doing for a long time with every kitchen appliance. Specifically, I have proposed that the EU Commission identifies unsustainable forms of mining (specifically, unsustainable consensus mechanisms) and determines at what size they are no longer compatible with the environmental goals of the Paris Climate Agreement and the EU. After a transition period, crypto service providers would then have to stop engaging with large crypto assets that continue to rely on unsustainable mining. This creates incentives, for example for large projects like Ethereum, to get serious about switching to sustainable mining.
Ensure responsibility & prevent circumvention
Many existing cryptocurrencies are operated by decentralised miner networks. No one assumes the role of an issuer or responsible party. Under the buzzword “decentralised finance” (DeFi), also crypto services are already offered on a decentralised basis. Often, initiators or developer groups can be loosely attributed to the projects, who are de facto responsible for governance, but who typically do not appear as legally responsible. This undermines the central principle of our social market economy that all actors must take responsibility for their actions. The EU Commission’s draft had a blind spot here, as practically all the rules started with the issuer of a crypto-asset. I have therefore proposed that for issuerless crypto-assets, crypto exchanges and other service providers must assume the obligations under MiCA. In particular, they must provide mandatory information material (called “white paper” in the Commission’s proposal) and also be liable for the information provided therein.
But the best rules are useless if they can be easily circumvented. Since crypto services are almost always provided online, there is a danger that providers from abroad simply do not comply with the new rules and still offer their services in the European single market. This undermines fair competition and puts compliant European competitors at a disadvantage. The online circumvention of our laws has always annoyed me, also in other policy areas, but the EU Commission has so far failed to provide effective answers. MiCA also does not contain any measures on how to prevent circumvention by foreign providers. Similar problems also arise from DeFi applications. I have therefore proposed that ESMA should examine the extent of circumvention in an annual report and propose possible countermeasures. In its major review report, the EU Commission should then present concrete proposals after three years on how the circumvention of European law can be effectively prevented in the future.
With green European greetings,
Sven Giegold
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Our green amendments on MiCA:
https://sven-giegold.de/wp-content/uploads/2021/06/20200531_MiCA_Green-AMs.pdf
Legislative proposal by the EU Commission of 24 September 2020:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020PC0593
Data on the resource consumption of Bitcoin and Ethereum with many comparisons:
https://cbeci.org/
https://digiconomist.net/bitcoin-energy-consumption
My first statement on the Commission proposal of 24 September 2020:
https://sven-giegold.de/en/commission-proposal-on-crypto-assets-and-libra/
Position of the European Parliament on a regulation of crypto-assets of 11 September 2020:
https://sven-giegold.de/digital-finance-im-econ/
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