The European Parliamentary Research Service (EPRS) has, in its Thursday, September 21 publication, called for heightened oversight of the global digital assets market. The report supports formulating a European regulatory framework aligned with global efforts.
The report admits that the decentralized nature of crypto assets and regulatory arbitrage potential emphasizes the need to harmonize regulation applied in various jurisdictions.
The Thursday report outlined recommendations demanding enhanced oversight for the non-EU regulators. The report indicates that doing so would deliver greater stability and nurture the global crypto market.
EU Financial System Vulnerable Unless Harmonized with Global Regulatory Framework
The report captures concerns regarding various channels that the EU financial system is vulnerable to relying on policy actions utilized by non-EU countries. The EU financial system is overly reliant on the stance adopted by the non-EU countries provided for under the Markets in Crypto-Assets (MiCA). Failure to harmonize the EU regulatory framework set to become effective come December 2024 risks eroding the autonomy of the zone’s financial system.
The EPRS report admits that the regulation implemented in the non-EU countries draws concerns about financial stability. The concerns arise from the inability of global financial institutions to cope with the huge price variations. The publication decried that volatility and losses suffered during shock outcomes in crypto-asset markets could strangle global financial institutions.
The EPRS publication authors illustrated that the interconnectedness witnessed in today’s global financial markets necessitates convergence in the oversight of cryptocurrencies. The authors added that regulatory arbitrage potential and decentralized attributes in digital assets yield the essence of converging regulation in the key jurisdictions.
Divergence in Crypto Assets Regulation Yields Oversight Fragmentation
The report criticizes the divergence existing in crypto assets regulation. The resulting fragmentation, notably exhibited by the US and developed peers, arises from the absence of a federal-level regime applied to crypto assets.
The report laments that the United States has allowed states to formulate substantial divergence in their regulatory approaches, leaving fragmentation inevitable. The report utilizes the New York state that unveiled BitLicense in 2015, directing the crypto exchanges to file detailed disclosures regarding their operations. The state imposes mandatory filing with the Financial Services Department and compliance with the know-your-customer (KYC) requirements.
The emergence of fragment oversight within the US states prompted the exodus of major crypto operators. In particular, Kraken replicated ShapeShift’s decision to halt serving the New York customers and terminate service within the New York state.
The EPRS report shows a contrasting regulatory spectrum adopted by Wyoming State for its pro-crypto climate. The authors note that the state prefers blockchain technology firms embracing the decentralized autonomous organization (DAO) legal status. The report indicated that Wyoming State favors the unique limited liability company form in DAO to facilitate them offering blockchain-based services.
Reviewing the UK Regulatory Approach Relative to the EU MiCA Framework
The Thursday report by the EPRS reviews the United Kingdom’s march towards its global crypto hub. The authors note that the UK adopted a unique framework that handles regulation relative to specific crypto assets.
The report observes that the UK prioritized the stablecoins framework rather than pursuing the broadly defined crypto assets as stipulated within the MiCA framework. The report cites a previous study by the European Parliament suggesting growing divergence between the EU and the UK in the future. The divergence could hinder the identification and regulation of the crypto asset.
The authors point to the Japanese approach that mirrors the UK approach of building a regulatory framework on the existing legislation. The framework guarantees investor protection while obligating stablecoins’ intermediaries to guarantee redemption at par value.
Besides the user data protection, the Japan approach mandates the stablecoins issuers and intermediaries to adhere to anti-money laundering.
The report indicated that tightening regulation within the EU relative to the non-EU countries could adversely affect the crypto-assets market development. The authors observe that a tighter regulatory framework could trigger limited though positive effects.
Consequently, the regulatory action undertaken by the EU should be devoted to bringing benefits. Nonetheless, third-party policy input is necessary to complement and prioritize strengthening financial stability.
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