Written by Lone Fønss Schrøder, CEO of Concordium and Vice Chairman of the Board at Volvo, Ingka and Ikano Bank.
On June 22nd, just eight days before the European Parliament, European Commission and European Council agreed on a major cryptocurrencies regulations package (known as European Union Regulation on Markets in Crypto Assets, or MiCA,) Christine Lagarde, president of the European Central Bank, accused crypto assets and decentralised finance (DeFi) of threatening the financial stability of the region.
Crypto companies have long called for freedom of growth and digital innovation, and the back and forth between industry players and lawmakers is nothing new. Back in April, forty crypto companies cosigned an open letter to EU institutions asking for “common-sense regulation, standardised compliance procedures and an innovation-friendly business environment,” fearing excessively strict directives to come.
The upcoming policy framework is set to regulate unbacked crypto assets, stablecoins, and trading platforms and wallets in which crypto assets are held, introducing the need for issuers to have a licence and putting in place customer safeguards for the selling of digital tokens. It officially makes Europe the first continent with cryptocurrency regulation, and was branded as the European Union’s answer to crypto concerns in the same way that GDPR rules were for privacy.
As such, it is a single regulatory framework overseeing crypto issuers and service providers who have so far operated largely unregulated, and whom lawmakers feel would benefit from a clear set of checks and balances. However, as they currently stand, MiCA regulations do not address decentralized crypto staking and decentralized lending, and they might still need additional regulatory clarity in respect to licences: the package appears to leave decentralised products unregulated, but regulate the same products’ users, making it unclear when a licence is actually needed.
In her June 22nd comments, Lagarde expressed concern about crypto assets, markets and services being interconnected with traditional financings, which she identifies as the main risk to financial stability. For this reason, she proposed a set of additional regulations (MiCA II) to oversee crypto-asset staking and lending activities, as well as DeFi, which have currently been left out of the first package (MiCA I).
Her thoughts on DeFi posing a risk to financial stability, specifically, align with those of many other regulators urging for more security and tighter control on the sector as a whole: with DeFi’s total value locked currently standing at $58.69 billion, safeguards for both consumers, enterprises, and institutional stakeholders are clearly needed. But as MiCA I won’t be implemented before 2024 – something else that understandably bothers Lagarde – we would have to wait quite a while before a potential MiCA II package sees the light.
By then, the Web3 additions to Web 2 currently taking place might be at a very different stage, as its transformation has moved at the speed of light ever since Facebook changed its name to Meta last year and ideas like the metaverse and non fungible tokens became buzz-worthy. Long after it was first conceptualised in 2014, popular understanding of what Web3 stands for is still ambiguous, but at its core, Web3 is simply a decentralised, inclusive and peer-to-peer iteration of the internet. It is supported by innovations like blockchain technology, cryptocurrencies, and NFTs, and exists to give power back to its users while reducing that of third-parties and intermediaries like financial institutions.
New products and services complying with regulation will arise out of the growing interest in cryptocurrencies and decentralised finance. At Concordium, we believe that the future of Web3 will revolve around a mature, trustworthy blockchain that both users and institutions like banks, regulators and businesses can use and trust.
We created Concordium as a layer-1 blockchain integrated with the ID framework built into the protocol, conceived so that the traditional world we live in can seamlessly meet that of tomorrow, without sacrificing compliance or user-friendliness.
While global adoption of digital currencies has increasingly taken off to the point where it’s impossible to deny its impact and capabilities, regulators have struggled to keep up and get the necessary laws in place to allow for needed supervision.Regulators pass are now ready to pass and subsequently enforce rules the first level of rules to protect consumers, but regulation of decentralized products are still to be dealt with and the technology itself needs to mature when it comes to aspects like safety, accountability, and usability before businesses can trust it enough to build true infrastructure on blockchains. This is why Concordium, which supports regulatory compliance, created a blockchain with business applications and global adoption in mind.
Blockchain technology needs to move in the direction of maturity and trustworthiness, and because Web3 cannot flourish without the necessary infrastructure in place to support it, both regulators, blockchain and crypto providers should aim to help bridge that gap.