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TBW #33: The mirage of centralisation 😬

TBW #33: The mirage of centralisation 😬

Read all about The Big Whale's 33rd Premium newsletter.

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To devour this week

🖊️ Editorial

🔥 Our exclusive news

⚡ ️ Europe: notre dossier

🤖 The Big Focus

THE BIG SPLASH

The mirage of centralisation 😬

Looks like déjà vu. Anyone who remembers the collapse of Celsius in the spring surely felt the same way yesterday when they saw what was happening with FTX.

In just a few hours, the US platform fell like a house of cards, causing a mini crash on the markets (-11% on bitcoin, -18% on ether) and above all leaving hundreds of thousands of customers in absolute limbo.

Just 10 days ago, SBF was telling us that "everything was fine" (his interview is here). This latest 'affair' is a real wake-up call for an industry that absolutely must mature. Why resort to practices reminiscent of the worst of traditional finance?

For our part, we firmly believe in Web3, in the philosophy behind it, and in the fact that "decentralisation" should not just be a slogan, but an everyday practice.

In this world, which is not necessarily easy to grasp, your weapons are a Ledger-type hardware wallet to store your cryptos, applications like Ledger Live, Metamask, Rabby or Frame to interact with decentralised finance, and protocols like Paraswap or Aave to exchange your cryptos and make them grow.

This obviously requires you to protect your private key, but financial freedom comes at a price. And it's more than worth it!

THE BIG NEWS

Our EXCLUSIVE NEWS

👉 Influencers: Bercy consults the sector

We told you about it last week: the European authorities 🇪🇺 want to regulate the practices of influencers, in particular by requiring them to publish their links of interest with the projects that fund them. This is the intention of the future MiCA regulation, which will come into force in 2024 (at best). At the same time, European countries are also making progress on their own systems. France has begun work on a "certification" system for influencers - but not just crypto - that would be available from 2023 and supervised by the Autorité des marchés financiers (AMF). Consultations are progressing. According to our information, the Treasury, attached to the Ministry of Finance, has met with several financial and crypto players (platforms in particular) on this subject. Further meetings are planned. We'll know more in the meantime.

THE BIG STORY

Loved MiCA? You'll love the sequel

The European MiCA regulation was just an appetiser. Other texts are already in the pipeline (NFT, DeFi...), and the lightning collapse of FTX could push the EU to speed up work on a "MiCA 2".

Peter Kerstens is a rather discreet man. But for the past few weeks, the European Commission's 'financial stability' mister (he heads DG Fisma) has been stepping up his public appearances. 

His favourite subject? Crypto regulation, and more specifically the now 'famous' MiCA (Market in Crypto-assets) regulation, which is intended to provide an initial framework for the crypto sector.

The text will be definitively adopted in the coming weeks, while all the translations are completed, before coming into force in 2024. 

At the end of October, Peter Kerstens spoke at an event organised in Brussels by the Blockchain for Europe association. "MiCA is absolutely essential. It will enable the sector to develop while providing better protection for users", explained the senior Belgian civil servant to a half-empty audience. Thank goodness we were there 😅. 

This was 10 days before the American FTX, which was in the process of setting up in Europe, exploded in mid-air. You have all the details of the affair here.

What does MiCA provide for?

Many things:

 

  • A European authorisation for platforms. This authorisation (CASP) is not compulsory, but only companies that have it will be able to advertise and canvass customers in Europe. Approval will be available from 2024 and platforms will have 18 months to comply.
  • An obligation to inform customers about the environmental footprint of crypto-assets. CASPs will have to give the energy mix used by each crypto. Given the differences in calculation methods, we wish them luck!"
  • Platforms will have to verify the identity of the owner of a self hosted wallet (the unhosted wallet mention has been skipped) if a transaction goes through them.

Could FTX's fall have been avoided with MiCA? It's impossible to know, but already some people in Brussels want to do more 🧐.

"After the fall of Luna in the spring, what has just happened with FTX shows just how necessary regulation is," blows a source at the European Commission. A MiCA 2, which would be more restrictive for platforms, could therefore be envisaged fairly soon.

In the meantime, there are already other texts in the pipeline, on decentralised finance, NFTs, identity and the digital euro.

Even on stablecoins, which are affected by MiCA, things need to be clarified.

We go round the hot issues 🔥

Small clarification: none of the MEPs approached, including France's Aurore Lalucq, agreed to answer our questions.

 

1/ Stablecoins

Stablecoins are covered by MiCA, but unlike the provisions on "platforms", those on stablecoins are not yet very clear. 

The real issue concerns dollar stablecoins, which, let's not forget, account for 99% of the global market.

What's the "problem"? When MiCA was being finalised, the Trilogue (Commission, Parliament, Council) added an important detail that concerns stablecoins not indexed to the euro: daily volumes in the eurozone may not exceed $250 million; the text does not specify whether this is just volumes on exchanges.

Or most dollar stablecoins exceed this threshold. In Europe, USDC volumes exceed $1 billion, according to Circle the issuing company. If this is exceeded, MiCA predicts that non-euro-indexed stablecoins will have to fall back below $250 million (no one says how 🤯 ) or simply stop. "It's a way of killing off dollar stablecoins," bellows one industry insider.

Many crypto players are arguing for this volume limit to apply only to "payments", and not to exchanges in the crypto universe.

Will they be heard? The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) are due to clarify this point in the coming months.

In the meantime, and no doubt to avoid any problems, several American giants such as Circle have launched their own stablecoin euro (our interview with Jeremy Allaire).

Interviewed by The Big Whale, Circle, which is the issuer of the USDC dollar stablecoin (the 2nd largest on the planet) made no specific comment and explained that it wanted to be "compliant" with European regulation.

 

2/ NFT

Until the last moment, NFTs were almost included in MiCA, before finally being ruled out. 

Why? Quite simply because the European Union only has powers in financial matters. 

If an NFT is considered a financial product, then it can regulate them. If, on the other hand, NFTs are considered works of art, goods or consumer products, it has no latitude. And this is the option that has been chosen, except for certain NFTs associated with financial products, notably in decentralised finance. "But their definition is still very vague", explains Simon Polrot, head of the European crypto initiative (EUCI), a lobby group present in Brussels.

The European Union has planned to regulate NFTs. A report, steered by the vice-president of the European Parliament, Eva Kaili, is due in the first half of 2023 on the subject. It is not yet clear what the report will cover. "The aim is to legally define NFTs", explains the Greek MEP.

Some people are concerned, however, that regulation will penalise the sector. "It wouldn't make sense to regulate NFTs. It would be like regulating PDFs," explains Clément Tequi, head of Capsule Corp. Labs, the laboratory that supports Ternoa blockchain projects. "We need to apply to NFTs the regulations that correspond to the nature of the underlying asset", he adds.

 

3/ DeFi 

This is surely one of the hottest issues in Brussels. A fortnight ago, the European Commission published a report on DeFi, which is intended to serve as a basis for regulating the sector.

The report does not impose any specific direction. "Which is a very good thing," Simon Polrot points out. It puts all the possible options on the table.

 

  • Complete supervision of protocols by the authorities (European financial and banking authorities).
  • More granular supervision. Only the largest protocols would be concerned, according to volume criteria in particular.
  • Supervision of blockchains to detect anomalies.

 

The only point that remains very complicated to address is the KYC (Know your customers) policy. How do you ensure the identity of users who don't necessarily want to reveal it. "There's going to be a big battle on this front", confirms a source at the European Commission.

The Commission has given itself a few months to get feedback from the sector. In the meantime, it will prepare a first draft text on the subject. It should be ready for the first half of 2023.

 

4/ The digital wallet 

This project is not linked to MiCA, but it could have a direct impact on the industry. 

From 2024, all Europeans will have a "public" digital wallet. This wallet is intended to store the digital identity of Europeans, in other words their passport, diplomas, vaccination pass, etc. And what about their cryptos in the future?

While there are no plans for this, it is entirely conceivable that the wallet's private key could be used to manage a crypto wallet. "We can imagine a system where we have a European wallet linked to a European blockchain to which we would bring documents," explains a spokesperson for the European Blockchain Services Infrastructure (EPSI).

THE BIG FOCUS

Europe: Where is the crypto "lobby?"

While the industry continues to grow, it is still struggling to really make an impact in Brussels.

Test it. Go to Brussels and ask Commission officials or visiting MEPs whether they see much of the crypto players. Their answer will often be the same: "Honestly, not too many."

Some like Circle - which is American - are present. But that's still a small minority...

The reasons for this lack of clout are well known: the industry is very young and many policymakers don't yet take crypto very seriously. "There's a big image deficit," explains Karel Lannoo, head of the European Credit Research Institut, a European think tank specialising in financial regulation.

Not sure the FTX-Binance episode will be very effective from that point of view 😅.

A financial problem?

Lobbying is also an expensive business. Several European trade unions such as the European Crypto Initiative (EUCI) are trying to make an impact, but their resources do not allow them to do much more than reports and analyses. "With our current resources, we can't do all the ground work we need to convince politicians," explains Simon Polrot, director of the EUCI. 

By way of comparison, Meta spends several million euros each year on lobbying. Mark Zuckerberg's group alone has more than 10 people in Brussels who have lunches and make contact with the circles of power 🚀.

So what's the solution? Some are arguing for companies in the sector to give more. "There's already money out there," brushes off the head of a major French group. But the initiatives are too fragmented, with structures in France, Italy, Germany...

"The unions need to get together," explains Dimitrios Psarrakis, who became a lobbyist in Brussels with the GBBC Digital Finance after working as an adviser to the Commission on MiCA. The only question is under what umbrella.

This edition was prepared with ❤️ by Raphaël Bloch and Grégory Raymond. The Big Whale is a free and independent media. By supporting us, you are contributing to its development.

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