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The EU is hoping to create one of the most innovation-friendly regulatory regimes for blockchain technology globally

Lakestar | Insights | Nov 30, 2020

Nicolas Brand and Pēteris Zilgalvis - The EU is hoping to create one of the most innovation-friendly regulatory regimes for blockchain technology globallyIn September 2020, the European Commission proposed a comprehensive legislative package for crypto assets and blockchain technology as part of its broader European Digital Finance Strategy. Pēteris Zilgalvis, one of the key contributors to the proposal, provides insightful context to the current draft and makes a bold invitation for industry participants to contribute and provide feedback.

Lakestar Partner Nicolas Brand in conversation with Pēteris Zilgalvis, Head of the Digital Innovation and Blockchain Unit at DG Connect within the European Commission. Pēteris has been working for over 25 years at the European Commission, the Council of Europe and the World Bank. Originally with a background in environmental law, he started covering financial markets, cryptocurrencies and blockchain innovation in 2013, when he was a Visiting Fellow at the University of Oxford. He is also co-chair of the European Commission’s Fintech task force.

Today we want to talk about two legislative packages recently proposed by the European Commission.

First, regulation on Markets in Crypto Assets – or MiCA – and second, a pilot regime for market infrastructures based on distributed ledger technology. Both proposals together are 206 PDF pages full of content and thought leadership. Can you give us an idea of the amount of resources that went into drafting them?

There is a joke going around that there are more Google lobbyists looking at the digital services act than there are people drafting it in Brussels. With MiCA in reality it’s a couple of colleagues under the leadership of a head of unit in DG FISMA, as well as myself and two colleagues contributing on the decentralised ecosystems and utility tokens.

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We spent only a share of our time on it on my side so it’s probably equivalent to two or three full-time roles altogether, however not taking into account the discussions by the Commissioners and the time now being spent in the European Parliament. We are quite efficient I believe.

How do the proposals fit in with other relevant European legislation such as the Digital Finance Strategy overall?

We see the whole Digital Finance Strategy as tackling fragmentation in the digital single market and giving the EU a framework that facilitates digital innovation. We also want to address new challenges and risks and in particular give crypto assets legal certainty.

We want to support innovation as well as consumer protection and this is where we are in agreement with our colleagues across the Atlantic in the Securities Exchange Commission: we don’t have a mandate to get rid of protection for consumers or investors. We are also focused on market integrity, financial stability and mitigating risks to monetary policy transmission and monetary sovereignty.

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The approach is pro-innovation but one that does not expose the consumer or the investor to more risks than with traditional financial products.

It is remarkable that you are in effect creating a new asset class that gets its own legislative treatment, crypto assets, and a set of new actors, such as Crypto Asset Service Providers. What are you hoping to achieve with this current package?

We are creating a taxonomy of crypto assets. Those that are qualifying as financial instruments, we clarify that they are covered by existing rules. Then you see the pilot on distributed ledger technologies for market infrastructures which is also firmly within existing financial markets. Then there are the crypto assets that are not covered by the existing rules and are subject to MiCA. These are the utility tokens and the asset reference tokens, including e-money tokens.

With this we make sure there are no more grey areas. We want innovation but we also want regulation and certainty. After MiCA in combination with MIFID, the Markets in Financial Instruments Directive, there won’t be tokens any more that are in an unknown space. Everything is covered with a regime that is risk based. Where there are less risks there will be a much lighter level of regulation.

overview of EUs crypto proposals - The EU is hoping to create one of the most innovation-friendly regulatory regimes for blockchain technology globally

You are, in effect, legitimising an entire asset class. Could you share with us the process unfolding now before this becomes law?

It follows the usual EU legal process. We produced this proposed regulation and the civil servants prepared the draft, which was adopted by the Commission’s political leadership, the College of Commissioners. Now it has been submitted to the European Parliament, the Council and the member states for adoption. Nothing is adopted without the consent of the member states and if there is disagreement between the parliament, the Council and the member states, it goes into conciliation procedures.

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This is an important message for people in the community who feel that a definition or a provision could have been better drafted – they can contact their Members of the European Parliament and their national representatives and propose adaptations. This negotiation and debate is going on right now.

You are creating a new actor to be regulated, Crypto Asset Service Providers. Could you describe briefly what regulation is planned to apply?

Crypto Asset Service Providers offer services such as custody, the operating trading platform, exchange services, execution and placing of orders, reception and transmission of orders and advice. They will be authorised to provide their services in the EU and will be able, via passporting, to operate in all the EU countries. The authorisation can be withdrawn, which is important: this underlines that consumers and investors are protected.

Providers are obliged to act fairly, honestly and professionally in the best interest of clients. These principles have arisen from previous Commission regulation of financial services based on prudent requirements, organisational requirements, safekeeping of clients’ crypto assets and funds and complaint handling procedures. Just because we are using a new technology does not mean that complaints are over. We also need to prevent conflicts of interest and supervise certain degrees of outsourcing.

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