EU Markets in Crypto-Assets (MiCA) with Seth Hertlein, Patrick Hansen, & Rebecca Rettig

In today's episode, we're talking about the state of crypto regulation across the pond. Is it as bad over there as it is here in the United States? There is a landmark crypto bill over in the EU called MiCA (Markets in Crypto-Assets) and its worth paying attention to! We brought on some EU regulation experts, Rebecca Rettig, Chief Policy Officer @ Polygon Labs, Seth Hertlein, VP, Global Head of Policy @ Ledger, and Patrick Hansen Director of EU Strategy and Policy @ Circle. ------ MetaMask Learn https://bankless.cc/metamaskshow ------ JOIN BANKLESS PREMIUM: https://newsletter.banklesshq.com/subscribe ------ BANKLESS SPONSOR TOOLS: KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum EARNIFI | CLAIM YOUR UNCLAIMED AIRDROPS https://bankless.cc/earnifi ------ Timestamps: 0:00 Intro 4:45 Pond Temperature 9:30 U. S. vs. the EU Regulation 13:30 Is MiCA Passed? 15:50 Should the U. S. Be Jealous? 18:30 MiCA Grading 20:55 DCCA Grading 22:22 MiCA Stablecoins 29:35 EU Restrictions 37:36 MiCA Self-Custody 44:22 Fear Ideology 46:40 U. S. vs. EU Regulation & Innovation 51:40 Closing Thoughts 58:50 Disclaimers ------ Resources: Seth Hertlein https://twitter.com/SethHertlein Patrick Hansen https://twitter.com/paddi_hansen Rebecca Rettig https://twitter.com/RebeccaRettig1 ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ryan Sean Adams?

  Talking about the state of regulation in Europe, not the US this time, but in Europe. This is a very relevant episode, David, because you and I have talked a lot about regulation in the United States. It's not a topic that I like to think about very often, but we do talk about it from time to time in Bankless Podcasts, and especially recently. We have hardly ever talked about what's going on in Europe, just kind of passing comments. I allocate about 10% of my brain to regulation because it's not fun to think about, but sometimes you gotta. This week is one of those weeks. And most of that time is reserved for the regulatory state of the United States.

• 0:41Ryan Sean Adams?

  So we wanted an update on what is going on in Europe. And it actually sounds like, David, the lawmakers in the EU are doing their jobs, actually looking at crypto somewhat objectively, I think, and proposing legislative frameworks to help us move forward. That is something that we don't have the luxury of in the United States. And I want to find out more about that on today's episode. But why don't you give us a tease? Who do we have on and what are we in for today?

• 1:11David Hoffman?

  Yeah, across the pond, there's this thing called MICA, Markets in Crypto Assets, which is the regulatory proposal, a landmark regulatory proposal that is working its way through Europe. And so we're going to talk about that because there is actual progress being made. For better or for worse, there's at least a conversation happening. There are some wins, there are some losses. And so we're going to talk about the nuances of the MICA proposal in the EU. But it's in stark contrast around to what's happening here in the United States, where there doesn't really seem to be a conversation, there just seems to be an onslaught. So at least we have that jealousy to look forward to from our American standpoint. We have three panelists on because this is a big conversation. We have Rebecca Reddick,

• 1:54David Hoffman?

  who is the Chief Policy Officer over at Polygon Labs, started there as of a week ago. So congrats Rebecca from the new position. There's also Seth, who is the VP of Global Head of Policy at Ledger. Ledger, the hardware wallet company, of course, that everyone knows. If you did not know, that it is a France-based company. Now you know. And also Patrick Hansen, Director of EU Strategy and Policy at Circle. And so these people combined probably know as much as there is to know about the state of crypto digital asset regulation in the European Union. And so we are going to get up to speed with what is going on across the pond as it relates to digital asset regulation and what can we really learn from the actual progress that's actually happening at least somewhere in the world, if not the United States.

• 2:39Ryan Sean Adams?

  And I, you know, I could comment further, but I don't think we should, David. I think maybe us dumb Americans should just stop commenting and bring on our guests. And we're about to do that. But before we do, we want to thank the sponsors that made this episode possible, including Kraken, our recommended exchange for 2023.

• 2:56David Hoffman?

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• 3:36David Hoffman?

  you need them, by phone, chat, or email. And for all of you NFTers out there, the brand-new Kraken NFT beta platform gives you the best NFT trading experience possible. Rarity rankings, no gas fees, and the ability to buy an NFT straight with cash. Does your crypto exchange prioritize its customers the way that Kraken does? And if not, sign up with Kraken at kraken.com/bankless. How many total airdrops have you gotten? This last bull market had a ton of them. Did you get them all? Maybe you missed one. So here's what you should do. Go to Earnify and plug in your Ethereum wallet, and Earnify will tell you if you have any unclaimed airdrops that you can get. And it also does PoApps and mintable NFTs. Any kind of money that your wallet can claim, Earnify will tell you about it. And you should probably do it now because some airdrops expire.

• 4:20David Hoffman?

  If you sign up for Earnify, they'll email you anytime one of your wallets has a new airdrop for it to make sure that you never lose an airdrop ever again. You can also upgrade to Earnify Premium to unlock access to airdrops that are beyond the basics and are able to set reminders for more wallets. And for just under $21 a month, it probably pays for itself with just one airdrop. So plug in your wallets at Earnify and see what you get. That's E A R N I dot F I. And make sure you never lose another airdrop. Welcome Bankless Nation to this panel about the state of crypto asset regulation over in the EU, talking all about this MICA proposal. On the right most side of the screen, we got Seth, who is the VP Global Head of Policy at Ledger. Below Seth, in the bottom right corner of your screen, we got Rebecca Reddick,

• 5:03David Hoffman?

  who is the Chief Policy Officer at Polygon Labs. Rebecca, congrats on the new position. And then in the bottom left corner, we got Patrick Hansen, who is the Director of EU Policy and Strategy at Circle. Seth, Rebecca, and Patrick, welcome to the show. Thank you guys so much for being here.

• 5:19Speaker 02

  Thank you.

• 5:20Speaker 03

  Thanks so much for having us and for touching that topic of EU regulation.

• 5:25David Hoffman?

  Yeah, and so just to really kick things off here, Ryan and I are gonna be dunces when it comes to this. So we're really looking to you guys to really help us understand what's going on here. And so Rebecca, just picking one of the three, I'll start with you. The state of crypto regulation in the United States is kind of a mess. How's it going across the pond?

• 5:43Speaker 02

  It's going much differently in the EU. I think we have to take it back to where MICA really started. This really grew out of the introduction of DM/Libra back in 2017. And I think real work started to be done on MICA in about 2018.

• 5:59David Hoffman?

  And you guys say MICA, not MICA.

• 6:01Ryan Sean Adams?

  Excuse me.

• 6:02Speaker 02

  I don't know, maybe Patty will correct me, but...

• 6:04David Hoffman?

  What is the right pronunciation? Give it to us.

• 6:06Speaker 02

  I've always said MICA.

• 6:08David Hoffman?

  MICA, alright, perfect.

• 6:09Speaker 03

  I also say MICA because it's markets in crypto assets.

• 6:13David Hoffman?

  Ah, consensus.

• 6:14Ryan Sean Adams?

  We're already making progress, this is great.

• 6:15David Hoffman?

  Yeah, alright, alright. Sorry for interrupting.

• 6:18Speaker 02

  Oh no, no, that's okay. So it started back and I think the concept really grew out of Libra and thinking about how to regulate that type of stablecoin. I think there was a similar type of interest and concerns in the United States as well. But it really spurred the European Union to think about what types of regulations should come out. Obviously, it was just approved by the Parliament, and we should talk about the process of what happens in the EU. This is very different than what happens in the US, although I guess you can think of the member countries as the states and the commission to be a much broader umbrella like we have in the federal system in the United States.

• 6:58Speaker 02

  But anyway, they built out this system where it really covers what are called CASPs, crypto asset service providers. These are centralized or C5 players. So things like custody, trading, exchanges, market makers and OTCs, investment advisors, they're covered by it as well as how you can do an issuance of tokens publicly. And then there are some exemptions for private token issuances as well. And it's really, it attempts to be a very comprehensive piece of regulation. But Seth and Patty should also sort of weigh in and talk about, you know, what we're building out here as well.

• 7:35David Hoffman?

  Yeah, Seth, Patrick, any additional things to add?

• 7:39Speaker 04

  Yeah, sure. So, you know, I think that's an important context that Rebecca brings up that, you know, that Mika really was the European response to Libra. And it actually goes a little bit deeper than that, which, you know, I think Patty can probably speak to. But there's, there's the sense in Europe, particularly among policymakers, that, that Europe sort of lost Web 2. You know, that, that all of sort of the Web 2 giants are, you know, well, first American and then increasingly Chinese. You know, the only one you maybe you could point to in Europe is Spotify. And, you know, so there's this, there's a sort of sense that Europe lost Web 2. And then when, you know, Facebook, sort of the, the big evil, you know, Web 2 giant from

• 8:24Speaker 04

  the US announces, you know, Libra, it really scared, it really scared European policymakers that like, oh no, we're going to lose the next thing. And, you know, so, so Mika's, you know, there was a strong reaction to Libra in the US. You know, I was in Congress the day, actually the building, when, when Zuck testified.

• 8:48Speaker 04

  For the first time on on Libra and you know, so there was a strong response in the US, but I think it was it was much more palpable in in in Europe, sort of the threat that it posed. And so, you know, policymakers immediately got to work on on MICA as a response to Libra, and that's why it overwhelmingly focuses on stablecoins to this day. But it sort of grew, it Frankensteined a little bit into other areas, you know, almost right up until the end. And and we can get into that a little bit later, you know, but that's it's, you know, that's sort of the origin of of of MICA. And I think a lot of why it's sort of structured the way it is.

• 9:26Ryan Sean Adams?

  So Seth, really quick, just to double click on that point before we hear from Patrick on that. So you're saying part of the impetus for this MICA legislation is actually the US wanting to not miss the next wave of the internet. The EU, not the US.

• 9:42Speaker 04

  The EU.

• 9:43Ryan Sean Adams?

  The EU. Yes, I said the US, not wanting to miss the next wave of the internet. And so this was like, was this like sort of a, well, in in Europe, our competitive advantage will be clarity and regulation. And that's how we will win crypto innovation in the next phase of the internet in in our jurisdiction. Was that the approach? And is that the strategy? And is that sort of coming through?

• 10:09Speaker 04

  Yeah, I mean, there there's there's a bit of a joke, you know, that that, you know, Europe's or the EU's chief export is regulation. You know, so I think and and, you know, there there have been some speak speeches from, you know, from from high ranking EU officials or from the from the European Commission in particular about about leading non regulation. So that's that's absolutely a philosophy that, you know, is is at play here. And and I actually don't think in the specific case of of sort of MICA Libra, I I don't think it's so much about

• 10:44Speaker 04

  you know, sort of not losing the next phase of the internet. I think it was more a specific fear of Facebook. And sort of the continuing the web two loss, I don't think it had quite, I don't think the opportunity of web three had had sort of quite

• 11:00Speaker 04

  gotten into the the political discourse yet. But but I'd love to to hear Patty's thoughts on sort of how how it develops.

• 11:08Speaker 03

  Yeah, happy to. I think to begin with, it's important to note that MICA is really a comprehensive regulatory package for crypto. So I think that's the main difference, by the way, with how things are currently planned in the US where there is one regulation that is supposed to cover stable coins, one regulation that could target crypto asset exchanges, for example. In Europe, MICA is really, I sometimes refer to it as the one regulation to rule them all, because it really covers all types of token offerings, ICOs, IDOs, etc. Covers all types, as Rebecca mentioned, all types of crypto asset services, so exchange, custody, brokerage, advice, etc. And it also covers stablecoin issuers and the operation of a

• 11:53Speaker 03

  stablecoin business. And on top of that, it also sets market abuse standards for the entire trading space. So it is one very comprehensive package in the EU that will be binding for all 27 EU member states. So I think it's very important to note that it's a milestone for the EU crypto landscape, because before MICA, we had a patchwork of different national regimes. Germany had its own licensing regime, France had a different one. And now with MICA coming into force, it will be basically finally formally adopted in April by the EU Parliament, and then it will enter into

• 12:34Speaker 03

  application after an implementation phase. There will be only that one harmonized binding rulebook.

• 12:40Speaker 02

  Yes, although two important exclusions from MICA, just for everybody. DeFi, or fully decentralized systems, has been excluded from MICA. DG FISMA, which is the main financial regulator in the EU, is doing a study and has been doing a study and engaging with industry in the DeFi space for quite a long time to be able to think about how to even come up with comprehensive regulation from DeFi. And then NFTs are also carved out of Mika, although they say fractionalized NFTs or this idea of like a series of NFTs. So if they sort of become fungible and not that they're non-fungible anymore, those are not carved out, but otherwise DeFi and NFTs are carved out. And hopefully we'll get into this concept of stablecoins and the idea that algo stablecoins are not carved out of Mika.

• 13:25Ryan Sean Adams?

  Oh, okay. Yeah, that that we want to earmark that. That sounds like a flag we want to mark. But let me just make sure I've got some of the facts straight. So this thing is our is kind of done. Mika is already done. And you said it goes forward. It's going to be is it passed in in Parliament in April and then it gets implemented? Like, are there any other approvals that need to happen? Are there any other potentials for this thing to get derailed? Or is this as good as done? And what's the timeline for this?

• 13:55Speaker 03

  Yeah. So essentially, the content is done. Mika has been approved by all the relevant committees in the EU Parliament and the Council of the European Union. Happy to dig deeper into, you know, how EU legislation works if you want to. That's very different from how US legislation works. And what's now missing is just a formal adoption vote from, you know, the plenary session of the EU Parliament, and then also from the ministers in the Council of the European Union. But as mentioned, it's only a formal vote. The content is already being translated into all the different official EU languages. The content is a done deal. And with regards to the timeline, so as mentioned, that those votes, those final formal votes

• 14:37Speaker 03

  are expected for April. The text will then be officially published 20 days after that vote in in what is called the Official Journal of the European Union. And it officially basically becomes law. But there are transitional implementation periods for service providers to implement those rules. And those, there is a 12 months, so a one year implementation period for stablecoin issuers like Circle. And there is an 18 month implementation period for all kinds of service providers like exchanges and custodian. So basically, 2024.

• 15:13Speaker 03

  Spring, summer, it will apply to stablecoins. And autumn, towards the end of 2024, it will apply to every other, so basically, company in the crypto space.

• 15:24Ryan Sean Adams?

  So I just want Bankless listeners to hear that. That's why we're having this episode on Mika is this thing's done. And we really need to understand it. And I think understanding this context will help us understand maybe the rest of the world's regulatory posture, and maybe even including the US. But this thing is done. It's moving towards the implementation phase. And we have hard dates, 2024, of when this thing is going to kick in.

• 15:51David Hoffman?

  For asking about the perspective of the United States. Well, I guess, congrats to the EU for getting something done. Rebecca, I'll throw this one to you. Should we, as a United States citizen, should we feel jealous about Mika? How do we, what's our sentiment check over like how good we feel about Mika as a whole? Mika, David. Excuse me, Mika. Excuse me, I'm still, I'm still learning here. Do we enjoy the things that it has? Maybe there are some wins, some losses, but at least the clarity is nice. Like, what's the sentiment? What's the gut check about the value of Mika here?

• 16:28Speaker 02

  I think with all regulation, there are some wins and some losses. But I do think that, and we can get into some of those, right? The algo, stablecoin thing, I think is a little more complex than, you know, having carved out DeFi and NFTs. I do think it's a great example to look towards, especially for what Patty said, how comprehensive it is. Now, it is about 380 pages. And they were going to vote on it in February, but because it takes so long to translate such a comprehensive bill into 27 different languages, it's, they postponed it to April. But it does really cover things, and it covers all the things we talk about in regulation, like, you know, how to custody something, notice and disclosure rules, AML, even things like sustainability and talking about environmental impact, which we think a lot about,

• 17:13Speaker 02

  safekeeping, the amount of reserves you need to have. So all the different types of regulatory issues that we talk about in the US are covered by Mika. And it has been, I think, even an example for other non-EU countries overseas in this idea of let's regulate centralized doctors first and then continue to learn about these more novel applications.

• 17:38Speaker 02

  Somewhat more crypto native and decentralized and then figure out how to build that out later because the UK, I'll just say it briefly because I know it's not a UK based show, but on February 1st, the UK's Treasury Department put out a large consultation on crypto assets and it very much mirrors what Mika looked like, Mika looks like. It's shorter and it does let industry weigh in. So if you're interested, go look at it and weigh in on it. But it looks a lot like it. And I think for whatever issues we may bring up or other people may have with Mika, it at least sets a good precedent.

• 18:09Ryan Sean Adams?

  Okay. So it's comprehensive. They've covered everything. They've excluded some things that are somewhat uncertain, which was heartening to me to hear you say earlier, they're excluding NFTs explicitly, excluding DeFi. Thank God, because I'm not convinced any legislator on the, on the planet, actually. I don't even think the crypto industry knows enough to, to propose any sort of rule set for these things. So it's, it's too early to do that. But I think what we'd love to know from our panelists today is like, overall, you said there were trade offs, right? Nothing's perfect, of course, but like overall, is this a win or a loss? Like, if we were to give, from the crypto natives here or the crypto community, a, a letter grade to this, is this a B? Is this a C?

• 18:53Ryan Sean Adams?

  Like, what are we talking here? And maybe it varies depending on kind of the categories. Like, maybe it's a, a B in, in stable coins. But maybe for like, well, maybe it's not for algo stable coins. Maybe that's like a D minus or something. I'm curious first, your take on this. Give us some letter grades for, for these categories to, to help us know where, where the wins and losses are, Rebecca.

• 19:16Speaker 02

  Me to start on the letter grades? Really putting me to the fire here, you guys. I'd say like an overall grade is probably a B, B minus, just because, you know, I think algos are complicated. I'm thinking about fractionalized NFTs are somewhat complicated. But you know, like definitely A for effort.

• 19:36Speaker 02

  And I will say, you know, a lot of the European regulators have spent a long time learning about some of the more complex and crypto native aspects here like DeFi and the like. So you have to give them credit for that, even though you don't see it necessarily in MICA. I would say, I'm actually fascinated to hear what Patty has to say about the asset classifications, because they do have a different set of classifications for different types of crypto assets. And they're not as comprehensive as other types of taxonomies that I've seen. So I'd give that maybe like a B minus as well, just because I think it's a little complex and it doesn't break out all the different types of crypto assets that we've

• 20:19Speaker 02

  seen. As far as regulations for CASPs, I think definitely a BB plus. Stablecoin issuers, I'm going to leave the grades to Patty, because I know the reserve requirements are very onerous. So I think that's a little complex. And then the last piece I'd say is on token issuances, where you don't have an identified issuer, that's pretty special. And I'd say I'd give it a BB plus, because they do put listings and white papers about those tokens on the exchanges, which I think is sort of the right shift of where the responsibility sits.

• 20:49Ryan Sean Adams?

  Rebecca, you were totally ready to give letter grades. That was amazing. Thank you. And just so we get the benchmark for the teacher assigning these grades right now. Rebecca, so do you remember the thing going on in the US, this proposed legislation called the Digital Commodities Consumer Protection Act? If that doesn't ring a bell, for bankless listeners, it's the thing that SBF was real excited about a few months ago, that got pretty far. What would be your score for something like that? Because I know my letter grade for that. But what is yours? Just we have a benchmark of what you consider good or bad.

• 21:27Speaker 02

  I think it's too hard to get, I'm gonna give the lawyer answer. I actually think it's too hard to give a letter grade to the DCCPA because it was never in a final form. So it's pretty unfair to, I'll give them definitely, there was a lot of effort that went into that for sure, but I think because we didn't see a final draft of it, too hard for me to letter grade it.

• 21:45Ryan Sean Adams?

  Well, my, the post that I read from Sam Bankman-Fried talking about how DeFi front-ends would all need to be registered at kind of a state level, to me, that was pure nightmare fuel. And that is like, I don't know if there's a grade lower than F in any nation, but that's what I would certainly assign that.

• 22:03Speaker 02

  But, but the point is, and I agree, like, conceptually, I agree on that. I think, you know, all regulation should really be activities-based. That's how it works today. That's how MICA is built out and all of these other types of things is really activities-based. But at the same time, like, it was just sort of, it wasn't final. So to take away anything there is really tough.

• 22:22David Hoffman?

  Patrick, I want to zero in on stablecoins here. And of course, since you over at Circle, I'm wondering if you could provide Circle's opinion as to how good or not good MICA's approach to stablecoin regulation is. Can you give your takes about how MICA relates, MICA relates to stablecoins?

• 22:40Speaker 03

  Sure, happy to. I'm not familiar enough with American grading levels, so I try to avoid that. But overall, I think what is positive, and that is true also for the stablecoin part, that MICA sets a clear regulatory path, right, for those kind of issuers and for those kind of businesses. So essentially, I think that's the first positive thing I want to mention. And the second one is that it's one harmonized regulation. So for stablecoin issuers, if they issue a stablecoin, for example, out of France or out of Germany, they will be able to basically passport those services into all the 27 EU countries. So that's That's a major milestone for crypto asset businesses in the EU.

• 23:24Speaker 03

  And if you dig a little bit deeper into the requirements, I think there's a lot, a lot that we essentially agree with within MICA. So, you know, generally, MICA allows also non-banks to issue stable coins, also so-called e-money institutions are allowed to do that. That I think is a prerequisite for, you know, fostering innovation and competition in that space. It also sets important consumer protection standards through those white paper and information disclosure requirements. It sets high bars with regards to the management of the reserve, the backing, et cetera. I think we, we agree with all of that and it sets very high standards with regard to, you know, how, how the business is, is conducted and governed.

• 24:07Speaker 03

  And I think that's, that's all stuff, we, principles of, of, you know, sensible stablecoin policy that we deeply agree with. There are single requirements that, um, in, in, in our opinion, and in the opinion of, of, of many others, could counterbalance and counteract those benefits. And it could stifle stablecoin innovation in, in, in the EU. And I think we're all aware of, for example, those issuance limits based on, for example, a transaction amount and transaction volume of non-euro stablecoins in the European Union. It's important to note here that the exact scope of that provision is not yet clear.

• 24:48Speaker 03

  Um, EU supervisors, so the European Banking Authority, which is going to supervise those big stablecoin issuers. It has still to publish and issue regulatory standards, what kind of transactions will actually fall into the scope of that restriction. And we know from many policymakers that publicly stated, um, that, you know, most of the investment trading transactions, et cetera, should fall out of that scope. The scope should be very, very narrow in, in nature and should only cover, for example, real world payments when I pay a merchant with a stablecoin.

• 25:25Speaker 03

  So I think the impact, the negative, the potential negative impact of that requirement depends largely on how that, um, requirement is standardized. And then there is a few other, you know, critical pieces where in our opinion, MICA's success really comes down to the technical specifications of the supervisor. One other example, MICA.

• 25:47Speaker 03

  MICA requires very onerous, prudential capital buffer requirements for stablecoin businesses. And in our opinion, as you know, a payment stablecoin issuer that is entirely backed by cash and cash equivalents, so only short-term treasury bonds, those additional capital buffers are just not proportionate to the non-existing credit risk that we face and to the minimal market risk. So we think there needs to be more flexibility with regards to capital buffers. And basically, those businesses like ours that have essentially no credit risk and very minimal market risk should face no capital buffers or very limited capital buffers compared to, for example,

• 26:32Speaker 03

  a business that holds corporate bonds in the treasury and in the reserve. And I think here again, the supervisor still has to give us the exact technical guidelines of what it actually means, what is a high-quality liquid asset, what does the capital buffer refer to. So hopefully, there is still room for improvement on those fronts.

• 26:52Ryan Sean Adams?

  And is that something, Patrick, because I don't understand this process, is that something that you think could be improved on the kind of the way it's implemented, right? Or is the capital buffer requirements for stablecoin issuers already kind of set in the legislation? And you're just hoping for an amendment at some point in time that could be a very long process?

• 27:12Speaker 03

  It depends on the exact requirement, but on most requirements, including the reserve management and the capital buffers, there will be technical standards and guidelines to be published and issued by the supervisors. So that's actually the caveat. I know we already said, you know, MICA is set in stone, MICA was already approved. But MICA sets the political requirements when it comes to the technical implementation of those requirements. Those have to be specified by the supervisors, and there's still room for, you know, interpretation and for improvement on many of those points. Well, it's, sorry, go ahead, Rebecca.

• 27:46Speaker 02

  No, just a bit like a quick gloss on Patty's point. There's also EBA and ESMA, who are, you know, two other EU-type regulatory bodies. And in addition to the country-specific or member state-specific regulations for implementation, they're going to put out a set of sort of like regs that you will have that give a gloss over what MICA sets out in terms of some of the more nuanced requirements as well.

• 28:11David Hoffman?

  Okay, and so it sounds like really the stance here is that there's perhaps some frustration from Circle or other stablecoin providers that the capital requirements are more onerous than what they should be, but perhaps to give them the benefit of the doubt, like, we can start by over-asking and as the EU and other agencies become more comfortable with crypto, they can start to pull back those requirements. That seems like a reasonable place to start. Is that fair?

• 28:41Speaker 03

  Yeah, definitely. I think it's, I mean, it's so great to have, you know, a clear regulatory path just to comply with. And there is still, I mean, as mentioned, there's so, so much room for improvement still. MICA will also be revised. Then in one and a half years from now, there will be a first report, review of MICA saying, you know, this works well, this works less well, what should we change, what could be added? Or, and so I think MICA is obviously a first, is probably the first comprehensive regulatory framework for crypto assets in the world, published by a major global jurisdiction. And it's, you, you don't

• 29:22Speaker 03

  get always everything right at, at the first draft, right? So there is room for improvement, for sure.

• 29:28David Hoffman?

  Yeah. Again, just stark difference to what we're used to inside the United States. The fact that there's paths forward. Again, I'm very, very jealous. If there's one aspect that we, that you talked about that I want to go back to, Patrick, and I want to know how actually codified this is. The notes that I have here is that MICA limits the daily average number of transactions and trading volume of stablecoins to $1 million and 200 million in euro. I think these are the notes that I have. And so there's restrictions on non-euro-denominated stablecoins inside of the EU as a result of MICA. Is this just the EU trying to protect its own denomination, which, I mean, makes sense from a nation-state perspective? Is that really what's going on here?

• 30:15Speaker 03

  Yeah, that actually that provision was added last minute into the legislative process by, you know, some member countries that were concerned for monetary sovereignty reasons. So they added that provision.

• 30:29Speaker 03

  We essentially believe that there were other means within MICA and with the other financial regulations that, you know, could have, you know, protected monetary sovereignty and financial stability on that front. And as mentioned earlier, I think it really comes down, if you look at the specific wording of that provision, it refers to transactions per day that are associated with users as means of exchange. And essentially, you know, the impact of that requirement comes down to what will the supervisor say? What is a transaction that is associated with users as means of exchange?

• 31:06Speaker 03

  If it is very narrow in scope, I think, you know, there are ways for stablecoin issuers to cope with that. But but overall, yeah, we believe it is, you know, the threat alone of having that issuance cap could obviously stifle stablecoin innovation. It could prevent some issuers to seek regulation in the first place, which is obviously not in MICA's interest. And apart from that, it is also not technology neutral because we have traditional financial rates, right? So we have a lot of credit payments, for example, already happening in the EU.

• 31:46Speaker 03

  And there is no issuance cap or transaction cap for non-euro payments with those traditional means of payment, right? So why singling out that that new technology?

• 31:58Speaker 03

  So yeah, overall, we are optimistic that in the so-called Level 2 supervisory guidelines and specifications, we can, you know, somehow make sure the scope is as narrow as possible. But yeah, overall, there's, you know, a lot of the media articles from crypto media, et cetera, have also somehow misinterpreted the scope of that provision.

• 32:22Ryan Sean Adams?

  Just really quick, Patrick, you keep using this term supervisor. It's up to the supervisor supervisor implementation. What is the supervisor again?

• 32:31Speaker 03

  The supervisor in Europe for those large stablecoins, it will be the EBA, the European Banking Authority. And it will be basically the financial authority that will have to make, you know, sure that those requirements are basically followed by those companies.

• 32:48Ryan Sean Adams?

  Oh, I see. So a supervisor is some sort of regulatory authority institution inside of the EU. So like maybe an equivalent of like FinCEN or something is a part of the position.

• 32:57Speaker 03

  Exactly. In the US, it would be the SEC, the CFTC, et cetera.

• 33:01Ryan Sean Adams?

  Ah, so there is a Gary Gensler of the EU somewhere over there.

• 33:04Speaker 02

  No, it doesn't. It really doesn't work the same. Patty, I had a question for you. Do you think that the last minute addition of that was meant to protect the digital euro? Because that's how I thought, that's why I thought it was put in there from a long-term perspective.

• 33:19Speaker 03

  I don't know about that, to be honest. I, I, I'm, I'm pretty sure the main concern was, you know, monetary sovereignty. But I'm not sure in which way it could be linked to the digital euro. I'm, I don't know.

• 33:33Speaker 02

  I mean, you're right. We do see the monetary sovereignty point really pulled through on MICA. So for something like asset reference tokens, which refer to certain types of other currencies, fiat currencies, the central, there's a provision that says the central banks can actually pull or cancel those types of asset reference tokens if they think it threatens monetary sovereignty. So the central banks do still have a lot of power under MICA, notwithstanding how strong the regulation may be in terms of allowing different types of assets and giving a path forward.

• 34:08Speaker 04

  Well, and I think the, the fear here is, you know, somewhere around ninety-seven point, or ninety-nine point seven percent of stablecoins in circulation are denominated in US dollars and zero point three percent are denominated in euros. And so the fear was, you know, MICA comes along, you know, legalizes, they're called e-money tokens, but basically fiat-backed stablecoins in, in the EU, you know, right now, that's, that's US dollar stablecoins, right? And so if sort of the Web three economy becomes, you know, denominated in US dollar-backed stablecoins, there's really no room or need for a euro-backed stablecoin. And I think that was the fear that prompted that last minute change.

• 34:55Ryan Sean Adams?

  I'm glad they're scared, honestly. I like, I want jurisdictions to compete against one another for the best crypto regulation legislation. I hope that's the outcome.

• 35:06David Hoffman?

  I know, I know we said the joke that EU's best export is their regulation, but honestly, like if it sounds like if this regulation was actually exported to the United States, that would just be really, really good. There's, I know there's one area of subject matter that I want to cover. That's the issue of self-hosted wallets and really what is the stance of Mika and how self custody works. And so Seth, I'm going to bring you into that conversation because obviously this is very, very related to Ledger, the producer of a bunch of self-hosted wallets. So all of that conversation and more is coming as soon as we can talk to some of these fantastic sponsors that make the show possible. Uniswap is the largest on-chain marketplace for self custody digital assets. Uniswap

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• 37:36David Hoffman?

  And Bankless Nation, we are back with our conversation about the state of EU crypto regulation. Seth, I want to throw this to you. Self-hosted wallets, self-custody, or being able to custody our own assets is very much a core part of this crypto world. How does MICA or MICA or any other crypto EU regulation impact this? What's the state of being able to take custody of your own assets in the European Union?

• 38:01Speaker 04

  Yeah, so a bit of a trick question. MICA doesn't actually deal with self-custody. It deals with institutional custody and cast, you know, how they hold customer assets or value on their behalf. But it's actually a companion piece of legislation called the TFR, the Transfer of Funds Regulation that touches on self-custody. And the TFR is the EU implementation of the FATF travel rule, which deals with how financial institutions transmit customer identification information along with funds transfers.

• 38:47Speaker 04

  And so the Transfer of Funds Regulation is part of a larger package of bills in the EU called the Anti-Money Laundering Package that also includes the Anti-Money Laundering Regulation, Anti-Money Laundering Directive Number 6, and the Anti-Money Laundering Authority. So there's a four-piece package all dealing with really the same topic. But the TFR was sort of pulled out of that and attached to MICA. And the Transfer of Funds Regulation deals with self-custody, really sort of along a spectrum of different scenarios.

• 39:24Speaker 04

  There's really sort of four scenarios that it envisions. The first is sort of a CASP to CASP transfer. So financial institution to financial institution, full travel rules up. A full travel rule applies. You know, confirmation from institution A must travel along with the funds to institution B. That's more or less the status quo. So that's that's fairly normal. That wasn't very controversial. At the other end of the spectrum is a pure peer-to-peer transaction. And the TFR does not apply in that context at all, which is also good news.

• 40:02Speaker 04

  What would the the interesting part was actually what happened in the middle, these sort of two middle scenarios. And I'll explain those, but to understand how we got to those outcomes. You really sort of have to understand the politics of how we got to those outcomes. So the two scenarios are a CASP transfer to the CASP's own customer is one scenario. The other is a CASP transfer to any other self-hosted wallet not belonging to its customer. Or.

• 40:41Speaker 04

  Sorry, can you hear me?

• 40:43David Hoffman?

  Yeah, I got you.

• 40:45Speaker 04

  Okay, or a transfer to a non-EU CASP. And so previously, some of the left-leaning parties within the EU Parliament, the S and D's, the socialists and democrats, the Greens, had tabled a number of fairly hostile amendments.

• 41:07Speaker 04

  Including one that would just outright ban self-custody in the EU. And they didn't have the votes to do that. And so they sort of moved to a compromise position, which became known as the Swiss rule. So prior to the EU, the Swiss had adopted the most strict implementation of the travel rule anywhere in the world. And it basically said that a CASP can only deal with a self-hosted wallet of its own customer, that it has verified that its customer owns and controls that wallet.

• 41:39Speaker 04

  And so Parliament started pushing for the Swiss implementation of the travel rule. Of course, there's also the EU Council, which is the other co-legislator in the EU system. And the Council is the representation of the governments of each of the 27 member states. And Germany is very influential in the Council. And so the Council took the position of, that became known as the German rule, which is more of a principles-based, risk-based approach. It's less prescriptive about you must do this in this situation. And you know, more about, you know, if a CASP, you know, sees a red flag or has reason to know of suspicious activity, it then has an obligation to dig deeper and conduct further diligence.

• 42:23Speaker 04

  So it's more of a rules-based approach in Parliament and a principles-based approach in the Council. Now, there was a third party at play here, and that was the French presidency that was leading the Council at the time. And their incentive was to strike a deal. They wanted to close the file and sort of get credit for finishing the TFR on their watch. And so they ended up doing what's very common in these sort of political negotiations and sort of splitting the baby. So they created these two scenarios where if a CASP is asked to transfer to its own customer's wallet, the Swiss rule applies, right? It has to, it has to verify that its customer in fact owns and controls that wallet,

• 43:09Speaker 04

  which is sort of a relatively high KYC standard. But then in a situation where the CASP is being asked to transfer to any other third party or a non-EU CASP, then the German rule applies. And the risk, and it's a risk-based approach, which is actually a lower standard. So you get this sort of strange scenario where a CASP dealing with its own customer that it already has a relationship with, has a higher KYC standard than dealing with a random third party or even another financial institution.

• 43:42Speaker 04

  So, you know, so that's sort of the spectrum of the transfer funds regulation and how it applies to self-listed wallets.

• 43:49David Hoffman?

  Is it coherent? Or is it a spaghetti mess? Because it kind of sounds like it's a spaghetti mess.

• 43:57Speaker 04

  I mean, you know, I think where it ended up, uh, you know, doesn't make a whole lot of sense. Uh, and I think it it it sort of reflects that that sort of ugly sausage making of the political process. But it's a it's a heck of a lot better than, you know, the original, uh, you know, proposed alternative of just outright banning self custody in the EU. Thankfully, that didn't happen.

• 44:19Ryan Sean Adams?

  Okay, I can't, I just can't imagine like so, um, it sounds like the outcome wasn't bad. You know, maybe maybe the B minus again kind of outcome, it could have been a lot worse.

• 44:30Speaker 04

  Sounds like the process was bad.

• 44:32Ryan Sean Adams?

  I can't imagine, um, that anyone would think in the EU that this would be an export, a regulatory export from the EU if they were planning to ban all self custody wallets. Like, how would that allow you to catch the next wave of the internet?

• 44:53Ryan Sean Adams?

  It it it seems like from, uh, what you guys are describing, the process is not just about, hey, we want it, we want to capture the next phase of the internet and support innovation. It is sort of the similar effect of what we see in in the US, um, process, which is like, we're worried about giving too much control to this non-state actor crypto thing. Is is that part of like, was there some kind of fear injected into this process? Like, where where where is that spirit? What where's that ideology coming from?

• 45:29Speaker 02

  That's true, that I think, uh, globally, there is a fear about losing government power when you don't have state backed fiat currency, um, as a medium of exchange or something that, uh, citizens use. So that pervades for sure in at least certain countries in Europe. I also think that the gloss, especially what Seth was talking about with the TFR. On the implementation of this FATF guidance, the concerns about illicit finance with crypto are the same everywhere. And so TFR is, you know, when you look at MICA by itself, it does, it makes sense that it's very comprehensive, as Patty said, those kinds of things. Yes, it may not be perfect. But when you get to the illicit finance side of things, it does feel

• 46:14Speaker 02

  very challenging for regulators across the globe, given the decentralized nature, the pseudonymous nature of self-hosted wallets and things like that. So you do have to separate them a bit when you're thinking about at least the export issue. And for sure, all governments and state actors don't love crypto because it does undermine or could undermine government authority.

• 46:36David Hoffman?

  Guys, we are sadly running out of time here. And there's so much more that we could have talked about. We could have talked about DeFi and NFTs. I kind of just wanted to zoom out and talk about this tweet that Patrick put out not too long ago, which was, I'll read it here. "US crypto is innovate, but somehow doesn't manage to regulate. But EU crypto regulates, but somehow doesn't manage to innovate." Patrick, can you talk about the inspiration for this tweet and what you meant by it and what we should learn and glean out of this tweet here?

• 47:09Speaker 03

  Yeah, happy to. I think, I mean, as Seth and Rebecca have said, I think it's, you know, part of the EU regulatory culture to have that ambition to regulate first, to regulate comprehensively, and to also export that kind of regulatory framework to all over the world. And that is, that is not only true for crypto, but that has been part of, you know, the EU's tech regulations in the past and also other non-tech and non-financial regulations that concern whatever, crops or, you know, chemicals or whatever. And the EU has been very successful with that in the past. If you look at, for example, look at What are the privacy policies of US tech companies?

• 47:53Speaker 03

  Those are primarily formed by EU GDPR regulation. The same is true for, for example, hate speech policies and, and, and for many other domains.

• 48:03Ryan Sean Adams?

  So, so the US is literally doing like a copy paste of good EU regulation?

• 48:08Speaker 03

  Not even essentially copy pasting, but there's just a lot of global companies that adopt or end up adopting EU regulations because they want to target the EU market. It's actually a phenomenon that has been coined by one Columbia professor in New York as the Brussels Effect, that basically the EU is somehow ruling the world through regulation. And the TLDR is basically the EU internal market. It's the biggest internal market in the world, 450 million people with a relatively high, you know, purchasing power. And so all companies all over the world want to target those customers in the EU.

• 48:48Ryan Sean Adams?

  So they're just setting the standard for the world?

• 48:50Speaker 03

  Exactly. In order to be able to target those customers, you have to follow new rules. And since most companies don't want to set up, for example, different production policies, but they harmonize how they, how they operate, many companies all over the world end up adopting EU rules. And so, yeah, regulation has always been, you know, a, a, a big focus of the EU. But on the other hand side, if you look at where innovation happens, if you look at, for example, the, the analysis index of, you know, the top 20 adoption, crypto adoption countries in the world, there's oftentimes not, not a single EU country in there. So we have a problem, and Seth mentioned that, we have a problem in Europe with tech

• 49:34Speaker 03

  innovation and value creation. There's tons of indicators that you could look at in, on, in that regard. If you look at, you know, VC funding, if you look at. Start-up unicorns, it's not a crypto-related matter, it's really a tech-related matter. So that's, you know, that's what inspired me to tweet that because on the other hand side, you have a lot of prospering US crypto businesses in the US, but evidently you have a hard time passing legislation in Congress, right?

• 50:07Ryan Sean Adams?

  But one implication in what you just said, Patrick, is I think you're implying if the US follows some of these other things like GDPR, then basically MICA regulation will become US regulation, like down the road. If Europe, once again, is sort of setting the standard for the rest of the world, do you think that this will just leak and find its way into the US?

• 50:30Speaker 03

  I think it's not a, you know, I'm not saying the same will happen with crypto. It's not a foregone conclusion, but I think, you know, the longer the US waits with setting its own regulatory framework, the higher the chances are that those large American crypto companies that also want to target EU customers, when they set up their own policies, their own operations, you know, for example, risk management policies, or how they safeguard their assets, or how they inform their consumers, that they end up adopting those EU rules, and they basically end up adopting those globally harmonized rulebooks. And it's not only me saying that, there's actually also voices in the US that are warning of that

• 51:14Speaker 03

  risk, I mean, US perceived risk, that if the US continues to struggle to provide that regulatory clarity, that, you know, regulatory frameworks like MICA could fill that gap. It's, I think it's even, if you look at, you know, the current US CFTC Commissioner, Caroline Tam, I think she warned of that in a recent CoinDesk article. So nobody knows what happens, but there is a possibility.

• 51:41David Hoffman?

  We've only got a few minutes left here. There's so much more that we have not covered. Rebecca, if you could just, we'll go one by one. If you just give your closing thoughts about anything that Patrick just said that came to mind, or anything left, any stones that we have not overturned that people should be focused on, just because we ran out of time here.

• 52:01Speaker 02

  I do, yeah. I mean, I agree with Patty and with what, you know, others have said publicly that there, Mika is at least good to look towards as a way to set out a framework for, one, token issuances, and two, with respect to the types of obligations that needs to be on CASPs, or C-Fi as we call it, you know, a little more colloquially. I think the challenge in the US, so just to put a gloss on it, is like, in the EU, they don't have this idea of like, this is a security, this is a commodity, and these are the people who have jurisdictions, and there's a jurisdictional fight over it, which is what I think has held the US back a little bit, is that we have, is that we have these really strong classifications for different types of assets in the US, and we've had this jurisdictional

• 52:44Speaker 02

  fight for many years. It's not the same type of thing in Europe. So, but also, it took Europe a number of years, right? We said it happened in 2017, 2018, and it just passed at the end of last year. It's a multi-year process, and it's still not implemented yet. So, I am hopeful, because there are a number of policymakers, both in the House and the Senate, who are looking to build out strong regulatory regimes that look similar to this, or at least, you know, have these similar types of ideas that really are based on consumer protection and market integrity, and I'm hopeful we will achieve that. And I'm at least grateful that Mika is out there as a path forward in the EU.

• 53:25David Hoffman?

  Seth, what other stones have we left unturned that you would advise people go down to investigate if they want to learn more?

• 53:31Speaker 04

  Yeah, well, so I think, you know, sort of responding to the innovation versus regulation discussion and Patty's tweet, you know, I think there's a temptation for, you know, for particularly European policymakers to sort of look and see, you know, oh, look, you know, these big US companies are adopting our rules, and sort of pat themselves on the back, right? But there's a, there's a cost to that. And, and sort of being the first to regulate, and regulating comprehensively, comes with a cost. And, and, you know, I think where that shows up is, if you look at some statistics... You know, if you look at the 20 largest tech companies in the world, 12 are American, eight are Chinese, zero are European.

• 54:14Speaker 04

  And if you zoom out a little bit more, if you go back to like around the year 2000, not just tech, but, but you know, the 100 largest companies in the world, I think 41 were European. Today, that number is 15. At that rate of decline, by 2032, it could be zero. Right? So, you know, regulation comes at the cost of innovation and, and the value creation, you know, that is the reward of innovation, right? So, you know, I, I think that aspect gets overlooked a lot, right? Regulation means everyone has to do the thing the same way. And if everyone is doing the thing the same way, no one's coming up with new and better ways to do it.

• 54:58Speaker 04

  You know, and so I think that's, you know, as, you know, American may struggle a little bit to sort of find the right approach. But I think it's actually smart to take, take its time and, and to not be so quick to sort of close all those doors and say, you know, we, the government have determined what is the optimal way for this industry to, to grow and operate and, and foreclose, you know, future better possibilities. And, you know, I think overall, you know, at the, at the top of the show, you know, you asked sort of what the, you know, overall grade was for, for MICA. And, and, you know, I think where it ended up is, you know, is about right, where Rebecca put it B minus. And, you know, I think that's because it was directionally correct in, in the end, right?

• 55:42Speaker 04

  It focused on the centralized aspects of the industry, CASPs, exchanges, centralized stablecoin issuers, token offerings, that made sense. But I, you know, I maybe have, you know, a bit of, a bit of PTSD toward, you know, the actual legislating process because there were many, many attempts and proposals to do much worse things in MICA that we luckily narrowly avoided. So one example was sort of the, and this made a big splash at the time, it was almost a year ago. But there was a proposal to ban proof of work in MICA in the European Parliament. I heard about this. It came four votes short of passing the European Parliament.

• 56:26Speaker 04

  And not just, and I'm not just talking about mining here, I'm talking about banning all proof of work based assets, right? Gone, right? Four votes.

• 56:35Speaker 04

  And and there were similarly, there were attempts very, very late in the process, like at the very end of the trilogue negotiations to pull in DeFi, to pull in NFTs, to pull in algorithmic stable coins. Luckily, we dodged those bullets. But the people that wanted to do that still want to do that, right? Before Mika one even finished, there are already calls for Mika two. And I think that's the the sort of the biggest, the biggest risk is that, you know, if if the EU just stopped at Mika, I think that would be a pretty good result for the industry, provide certainty, industry could grow. But it's not just Mika. Right? There there's level two texts. So the sort of regulatory rules for for Mika and the TFR

• 57:19Speaker 04

  are just getting started. And there's this whole constellation around Mika of sort of related regulations. There's DORA, the Digital Operational Resilience Act. There's the DLT Pilot Regime. There's the whole AML package. There's the EU Green Taxonomy and Retail Rules that are coming. And each of those will in turn have its own level two texts, right? And so we're talking about thousands and thousands of pages and the cumulative weight of all of that and the cost of complying with the cumulative weight of all that is extraordinary, which gets back to my original point, which is why there that zero large tech companies in Europe. So, you know, I think, you know, I don't know, I'll stop there. That's my that's my rate.

• 58:03Ryan Sean Adams?

  We certainly see these points. And yeah, there there's such an interesting trade off. I think right now, folks in the in the US are looking at what we have seem like rogue regulators who are using this approach like regulation via enforcement. And we're looking at what what's going on in the EU and saying, oh, can we have some of that? Like, a B minus ain't too bad versus like, not even knowing the letter grade, but having a professor who's arbitrarily assigning Fs whenever he or she feels like it. And that's the state that we're in right now. Panelists, thank you so much for giving us some time today and for educating us on Mika. We look forward to having you guys on once again. We appreciate it.

• 58:47Speaker 03

  Thanks so much.

• 58:48Speaker 04

  Thank you.

• 58:48Speaker 03

  Thanks.

• 58:50Ryan Sean Adams?

  Risks and disclaimers. Of course, Bankless Nation, none of this has been financial advice. It's not even regulatory advice. Regulation is risky. You could kill the innovation in your country if you're not too careful. All of crypto is risky as well. So is DeFi. You could definitely lose what you put in. But we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.