Regulators in Europe and around the world face a delicate balancing act when it comes to emerging technologies such as blockchain and digital assets. This is the view of Yves Mersch (Member of the Executive Board at the European Central Bank) who gave a keynote address at the recent London Blockchain Conference.
When discussing regulatory changes, there are typically a few fundamental principles that banks and other regulators typically need to address, Mersch said. Firstly, there’s the concern of regulations being introduced prematurely, or conversely, being implemented too late in response to various instances of scams and fraud, which could ultimately erode people’s trust.
However, if regulations are overly invasive from the outset, they may stifle innovation, but if they are excessively lenient, they could lead to outcomes similar to having no regulation at all.
Changing with the times to stay relevant
Mersch noted that digital assets and other emerging technologies have compelled banks and other financial institutions to adapt their business models, which means it is no longer possible for regulators to simply take a ‘wait-and-see approach’.
Likewise, governments across the globe increasingly have a significant stake in the advancement of CBDCs, as they seek to safeguard the independence and stability of their currencies, he said.
Mersch advised that regulators must exercise caution in the timing and implementation of regulations, as premature introduction could hinder innovation, while delayed implementation might facilitate misconduct. He emphasised, ‘It’s not technology that mitigates risk; it’s individuals who manage risk through technology.’
New regulations to reduce risk but promote innovation
Mersch’s presentation primarily focused on the EU and the UK and included an explainer on:
- The Financial Services and Markets Bill;
- The Markets in Crypto Assets (MiCA) Regulation in the EU;
- The development of a Central Bank Digital Currency (CBDC) in the UK.
Mersch drew specific attention to the Markets in Crypto Assets (MiCA) Regulation, which he believes is a good example of laws that help negate risks surrounding the industry without stifling innovation.
MiCA, as outlined by Mersch, has two primary objectives: harmonising digital asset regulations across EU member states and fostering innovation. Starting in 2024, MiCA will establish a comprehensive regulatory framework for digital assets, including issuers and service providers. Digital asset service providers, like exchanges and wallet providers, will need licences from national regulators to serve EU citizens.
MiCA will also introduce new classifications for various digital assets, specific rules, proof-of-funds requirements for stablecoin issuers, and a requirement for companies issuing digital assets/coins to publish a white paper detailing the project and potential risks.
Mersch noted that MiCA builds upon existing EU regulatory frameworks rather than reinventing them. It will incorporate capital requirements, governance standards, authorisation procedures, supervision of issuers and service providers, and reserve requirements for stable currency issuers, such as a one-to-one reserve ratio for permanent redemption rights.