Europe is currently at the tipping point of regulating cryptocurrency. The European Union has passed the Markets in Crypto-Assets Regulation (MiCA), which will establish uniform rules for crypto-assets across the EU market. Some of which many believe consumers
have been in dire need of for some time. This is an excerpt from the Future of Digital Banking in Europe 2024 report.
MiCA will apply from 30 December 2024 and will cover digital assets that are not currently regulated by other financial services legislation. The regulation will standardise issuance, trading, and management of crypto-assets, and include provisions on transparency,
disclosure, authorisation, and transaction supervision.
The regulation also aims to support market integrity and financial stability, and most importantly, to ensure consumers are better informed about the risks associated with crypto-assets as they navigate from Crypto Winter to Crypto Spring. The rules will
also stipulate that cryptocurrency is easier to track, but at the same time, more difficult for criminals and terrorists to use it.
From Winter to Spring: restoring confidence in crypto
In 2024 and beyond, humans and our increasingly intelligent machine counterparts will continue to come together to create a whole new world. Consumer and business interactions should ascend to new heights, redefining customer service and how individuals
experience it.
MiCA’s objective is to safeguard cryptocurrency users and provide a safe and secure environment by imposing regulations that ensure the protection of retail investors. However, one of the significant challenges when instilling consumer confidence has been
the lack of clear legal definitions and classifications.
While the new regulation addresses this by classifying various crypto assets into distinct categories, such as e-money tokens, asset-referenced tokens, and utility tokens, the application of this may not be as simple. Furthermore, while regulation may support
consumer confidence in digital forms of payment or banking, how will MiCA impact Europe’s cryptocurrency markets after it comes into effect? Is Europe prepared?
According to Amarjit Singh, EY’s EMEIA blockchain leader, "MiCA has the opportunity to bring certainty to the regulatory treatment of digital assets and crypto assets across the EU. Firms have been preparing based on the original regulatory announcement, but
as an industry that moves very fast it is key to maintain focus on how things evolve to ensure the EU continues to develop level 2 and level 3 texts at the right pace."
What Singh is referencing here is ESMA and the EBA’s legal instruments called Regulatory Technical Standards (RTSs), Implementing Technical Standards (ITSs), and Guidelines, that will support authorities and companies captured by MiCA. Before Standards or
Guidelines are adopted, the EBA and ESMA must consult with experts and other stakeholders to make sure they are fit for purpose.
Preparedness must be established at the right pace, but with price fluctuations and emerging technologies, this can be difficult to achieve. This means that further guidelines must be released as developments occur.
Tokenisation: scalable, efficient and secure?
At the start of 2024, the UK Government vowed to pass primary legislation guaranteeing user privacy in the event of a future digital pound. In response to a consultation, HM Treasury and the Bank of England reiterated that while no final decision had been
made, work would continue on a design phase. Concerns that were brought to the surface included access to cash, user privacy and control over their own funds.
To address these concerns, HM Treasury confirmed that if a digital pound were to be implemented, primary legislation would be introduced to guarantee privacy and control. At the time, Economic Secretary to the Treasury, Bim Afolami, said: "We are at an exciting
time of innovation in money and payments, and we want to ensure the UK is ready should a decision to build a digital pound be taken in the future. This is the latest stage in our national conversation on the future of our money – and it is far from the last.
We will always ensure people’s privacy is paramount in any design, and any rollout would be alongside, not instead of, traditional cash."
Deputy governor for financial stability, Sarah Breeden, added: "Trust in all forms of money is an absolute necessity. We know the decision on whether or not to introduce a digital pound in the UK will be a major one for the future of money. It is essential
that we build that trust and have the support of the public and businesses who would be using it if introduced."
Further to this, Victoria Cleland, executive director for banking and payments at the Bank of England explored how the UK’s real time gross settlement system would impact work on a wholesale central bank digital currency.
“An RTGS service open longer, with more and different types of participants, and which offers synchronisation to a wide range of ledgers, could achieve many of the benefits often associated with wholesale CBDC. It would deliver our vision of a wholesale
platform with more efficient and resilient wholesale payments provided by a competitive and mixed ecosystem of firms. And importantly would not require the creation of a completely new payment infrastructure.”
A future of 24/7 atomic settlement
It is clear that progress is being made to ensure that tokenisation is scalable, efficient and secure. Months later, in March 2024, the UK Government Technology Working Group, chaired by Michelle Scrimgeour, published a report on the second phase of its
work: Further Fund Tokenisation: Achieving Investment Fund 3.0 Through Collaboration. The report expands the potential use cases of fund tokenisation, the use of tokens as collateral for money market funds, and the role tokenised funds play in a fully ‘on
chain; investment market that will streamline back-office functionality.
Regarding this, Afolami said: “I am delighted to welcome today’s report from the Asset Management Taskforce’s Technology Working Group. As we work to grow the economy, the UK is ideally placed to seize on the transformative capabilities of technology in
this industry, combining our expertise in innovation and investment management. This report demonstrates – once again – that the UK is on the side of the pioneers. For the third phase of its work, the Technology Working Group will now shift their focus onto
how the UK’s investment management sector can harness the opportunities presented by artificial intelligence.”
Singh commented on this and said that: “The 2nd report from the Investment Association and the UK’s HM Treasury Asset Management Taskforce shines a light on how driving tokenisation from funds to the wider financial services ecosystem is pivotal. Just as the
internet has matured from Web1 to Web3, financial markets will mature, from Markets1 where we have written trade slips, to Markets2 where we have centralised trading, to Markets3 which is hyper personalisation, tokenisation, and 24/7 atomic settlement.”
DLT-based projects provide instant settlement by eliminating any time lag between trade and settlement, and simultaneous settlement by allowing all legs of multiple linked transactions to be settled at the same time. Atomic settlement is sometimes used to
refer to settlement that is both simultaneous and instant, but while simultaneous settlement is probably always desirable, instant settlement may not be. For instance, while real-time settlement can get rid of risk, instant settlement can restrict the number
of permissible trades and leads to a greater liquidity burden – because trading and settlement are decoupled and traders can only sell securities they already have.
Where DLT comes in is it can allow for an expanded settlement environment. This is also applicable in the case of CBDC where the technology can be used to implement a CBDC to execute and settle peer-to-peer transactions. However, this form of transaction
is also not without its risks.
In Pallavi Thakur, director, innovation at Swift’s view, while interest in CBDCs grows and exploration of tokenisation advances, there is a risk that solutions will be developed based on different technologies and regulatory standards, creating fragmentation.
This could lead to the emergence of systems that are unable to effectively communicate with each other and work across digital borders. These are, in effect, ‘digital islands’ that will create inefficiencies and prevent tokenised solutions from scaling and
reaching their full potential.
“For those reasons, we believe ensuring interoperability between tokenised financial solutions is the most important step to enabling widespread adoption of the technology on a global scale. Guaranteeing system interoperability will also be crucial to ensuring
tokenisation benefits from robust security protocols that can protect against cyberattacks and fraud. Interoperability – by design – will also be crucial to ensuring tokenisation benefits from robust security protocols that can protect against cyberattacks
and fraud.