'Europe must grasp the full potential of blockchain'
Asset News: The French Association of Securities Professionals (AFTI) wants to rally European financial firms more strongly around blockchain. Why?
Alain Rocher: Europe has undertaken to adopt regulation applying specifically to blockchain in finance to both encourage and supervise innovation. We obviously approve this initiative. In practice, the European Commission proposed a “digital finance package” on 24 September 2020, including regulation of MICAs (Markets In Crypto-Assets) covering digital financial assets and a “pilot regime” for market infrastructures based on decentralised registry technology. Initial feedback has been received from the European Parliament and Council on these two swaths of regulation being developed (along with a “Digital Operational Resilience” (Dora) regulation). Yet, there are reasons to fear that the issue will not be addressed properly. European MPs have so far filed almost 1,200 amendments to the MICA bill, and there is a risk of getting lost in the details, whereas matters of substance have not yet really been discussed. Blockchain probably constitutes a revolution in finance with a similar scope to that of the dematerialisation of securities in 1984, and stakes involved in this technology have not yet been discussed in depth.
What issues should be explored?
We do not think it is a good idea to start discussing regulation of blockchain-related activities, while this technology, which is complex both in itself and in its implications, is not fully grasped.
The pilot regime plan is a step forward in principle, as it provides for a temporary lightly regulated framework for market infrastructures and security tokens, so that innovation can deploy its potential. As such, it gives Europe flexibility which is similar to the US “non-action letter” mechanism. However, the proposed mechanism does provide framework for lots of testing, while limiting the assets concerned through ceilings on issuance amounts. It also provides for retaining trusted third-parties, which are centralised infrastructures such as multilateral trading facilities (MTF) and central depositaries (CSD) and for identifying exemptions. But shouldn’t blockchain mean eliminating those operators playing a notarial role, given that it is based on a consensus for certifying transactions? Why are we presenting the transposition of the old concepts as a done deal? We rather advocate a full revisiting of the validation of securities trades.
The same goes for MICA, which remains anchored in traditional concepts in wanting to regulate issuers and intermediaries. This approach to peer regulation will no doubt give way to regulation focused on technology and products. In addition, MICA wants to supervise all new financial assetsn although they cover very different concepts. Some digital assets have no issuers, such as cryptocurrencies. This is something entirely new. They must not be treated like utility tokens. In fact, MICA is focusing mainly on the issue of stablecoins and the competition they pose to central banks. We therefore feel that Europe must debate the fundamentals before starting to outline new rules.
Decision-makers must embrace blockchain technology more closely to understand the questions it raises.
How far along is the understanding of underlying issues?
Decision-makers must embrace blockchain technology more closely to understand the questions that it raises. People in the field and legal specialists must sit down with technology specialists. In the pilot regime text, the technology is defined in just three lines! Clearly, it is not properly understood, and regulation is therefore likely to miss the mark.
Generally speaking, the issue remains fuzzy for both market participants and decision-makers. The many experiments with central bank digital currencies (CBDCs) seem to be mainly publicity stunts, and we do not really see the reality behind them. The issue of distributed registers often spreads false ideas, such as the supposed speed of transactions that it makes possible, whereas transfer of ownership has to be signed off on by several parties. Another paradox: we are seeing more and more private blockchains, which is contrary to the principle of mutualisation that precisely make this technology interesting.
How can planning be moved ahead?
In a bid to make things clearer, AFTI will publish a guide explaining blockchain technology from the point of view of the post-market services that it can perform. Distributed registry technology is mainly a challenge for these businesses, as it can assume the role normally assigned to trusted third parties in charge of signing off on transfers of ownership and keeping securities ownership registers. Blockchain can pool these functions with its peer-based approach. It may also be able to move ahead on the issue of unifying securities law in Europe, which is running into various conceptions of property rights that are emerging with dematerialisation. We also believe a distinction must be made between the roles of blockchain trusted third parties for assets associated with an issuer and in the framework of assets like bitcoin, where security does not seem to be guaranteed at an acceptable level. We want to let as many European financial players as possible know about our reservations, so a true debate can begin. It’s becoming urgent.