Part 2. The MiCA Regulation
-1. In Part 1. I have unveiled the multi-level nature of blockchain and crypto-assets innovation, hinting at the reasons why crypto-assets pose a particular challenge to states, governments, and regulators. How should they respond to best achieve their objectives? Political ideology obviously plays a big role here: from a complete “laissez faire” attitude to a strict new legal regime, through “encouraging self-regulation” or “regulatory adaptation”, states and governments dispose of a full spectrum of possible responses, each with a different trade-off in social and economic costs.
-2. In the first chapter of Part 2 I will analyse these trade-offs, contrast the general approaches of the United States, China, the United Kingdom, and Europe and explore some of the factors which could have been considered when shaping the MiCA regulation. I argue that, unlike the US and China, who take toward crypto-assets consistent, if diametrically opposed approaches, the EU refuses to acknowledge any trade-offs and adopts an ambivalent approach.
-3. In the second chapter I will do a synthetic presentation of MiCA’s objective, scope and definitions, and main provisions, pointing at differences between the initial Commission proposal (dating from September 2020) and the latest version of the Regulation, approved by the European Parliament plenary and endorsed by the Council , although not yet published in the Official Journal at the date of this thesis.
-4. I will substantiate the argument that MiCA chooses objectives which are either divergent or inconsistent, while failing to even acknowledge the tension between them, therefore making no effort to reconcile them. Moreover, serious doubts are cast on its ability to fulfil its main objective (“legal certainty”) and on the radical approach it takes toward its fourth objective (“financial stability”).
-5. In the third chapter I underline the internal contradictions between, on one hand, the professed goals of the regulation and on the other hand its most likely outcomes based on a deep understanding of the technology, on experience, on comparisons with other jurisdictions and with other regulated domains. I argue that contrary to its stated objectives, MiCA fails to support the most promising avenues of innovation opened by blockchain technologies, which I dubbed “Northern” and “Coasian”; and that partly because of failing to support innovation, MiCA cannot effectively protect EU consumers either.
-6. In Part 1, par. 39, I had asked a central question of this inquiry: “can the MiCA regulation pave the way for the “Google of crypto-assets” to appear in the EU?” In Part 2 I answer in the negative and substantiate my answer. In Part 3, I’ll try to highlight what might be MiCA’s redeeming features.
Chapter 2.1. The case for regulation
-7. The mark of a “highly competitive social market economy” is that “resources are owned and allocated by such nongovernmental organizations as firms, households, and markets. Resource owners increase productivity through cooperative specialization.” In a world which has given up debates between communism and capitalism, the major battleground of the opposition between more and less governmental interference in economies has given rise to the “new economics of regulation”, a field of the “new institutional economics”, which “explores the various ways in which governments interfere with industrial activities for the good or for the bad.”
2.1.1 Economic growth, innovation, and the impact of regulation
-8. The central role of innovation in economic growth has been uncontested for more than a century, since Joseph Schumpeter published in 1911 his magnum opus, “The theory of economic development: an inquiry into profit, capital, credit, interest, and the business cycle”.
-9. That the EU economy needs sustained amount of scientific and technological innovation is in turn confirmed by the objectives laid down in the Treaties: “The Union […] shall promote scientific and technological advance.” As a 2016 report from the European Commission’s Joint Research Centre was underlining, “an ageing population and constraints on natural resources mean that future economic growth in the EU will be increasingly dependent on productivity-raising innovation.”
-10. Significant research efforts have been directed toward assessing the impact of regulation on innovation, since the widely cited 1978 study by Grabowski, Vernon and Thomas. In 2012, a meta-study (study of studies) published by the Manchester Institute of Innovation Research summarized the state of the art thus: “Regulatory framework conditions have been identified as important factors influencing the innovation activities of companies, industries and whole economies. However, in the growing body of empirical based literature, the impacts of regulation have been assessed as rather ambivalent for innovation in general, often depending on the different types of innovation. Different types of regulations generate various impacts on innovation, and even a single specific regulation can influence innovation in various ways” .
-11. Only a few years later, in 2014, a short study published by the European Commission identified and studied cases in which EU Regulation disabled innovation. In its introduction, the study was writing: “As recalled on several occasions by the European Commission and other EU institutions, EU’s innovation performance has been (on average) rather sluggish over the past two decades.”
-12. As one of my concerns is the divergent trajectories in terms of technological innovation between Europe and the United States in the last decades, I would also point toward a recent (2018) NBER working paper called “Technology and Labour Regulations: Theory and Evidence”. Authors Alesina, Battisti and Zeira look at the effect of labour market policies and regulations on technological innovation in developed countries. They observe that labour market regulation has a significant effect on technology innovation and adoption and note that data indicates “that countries with high labour regulation are less likely to innovate in the high skill sectors”.
"Innovation at the macro level is about 5.4% lower due to the regulation, a 2.2% consumption equivalent welfare loss." source: Banque de France
-13. A very robust quantitative analysis of the impact of regulations on technological innovation has been published in 2021 by the IZA Institute of Labour Economics. In this study Philippe Aghion, Antonin Bergeaud and John Van Reenen build a quantifiable growth model and apply it to firm data from France, where many labour regulations apply to firms with 50 or more employees . They find that there is a sharp fall in the fraction of innovating firms just to the left of the regulatory threshold, an effect which could indicate that firms stop innovating in order to stay below the threshold and avoid the constraints of the regulations. Further, a dynamic analysis shows a sharp reduction in the firms’ innovation response to exogenous shocks just below the regulatory threshold. When quantitatively fitting the parameters of the model to the data, the authors find that innovation is about 5.4% lower due to the regulation, a 2.2% consumption equivalent loss of welfare. Four fifths of this loss is due to lower innovation intensity per firm.
-14. These recent papers and studies should lead anyone to conclude that while regulation can have positive outcomes, it can also have significant negative effects on much needed technological innovation and that introducing new regulation should at the very least be done in a cautious manner, openly acknowledging, and carefully weighing the risk of stifling innovation, and whenever possible using quantitative assessments.
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[90] Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937, op. cit.
[91] Regulation of the European Parliament and of the Council on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937, PE-CONS 54/22, 3 May 2023, https://data.consilium.europa.eu/doc/document/PE-54-2022-INIT/en/pdf
[92] Treaty on the European Union, Art. 3(3), op. cit.
[93] A. Alchian, H. Demsetz, “Production, Information costs, and Economic Organization”, The American Economic review, Vol. 62, No. 5, 1972, http://www.jstor.org/stable/1815199
[94] J. Faundez, “Douglass North’s Theory of Institutions: Lessons for Law and Development”, Hague Journal on the Rule of law, 2016
[95] J-J. Laffont, “The New Economics of Regulation Ten Years After”, Econometrica, Vol. 62, No. 3, 1994
[96] TEU, Art 3(3), op. cit.
[97] D. Ciriaci, N. Grassano, A. Vezzani, “Regulation, red tape and location choices of top R&D investors”, Joint Research Centre “Science for Policy” report, IPTS working papers, 2016
[98] G. Grabowski, J. Vernon, L.G. Thomas, “Estimating the Effects of regulation on Innovation: An International Comparative Analysis of the Pharmaceutical Industry”, Journal of Law and Economics, Vol. 21, No. 1, 1978
[99] K. Bind, “The Impact of Regulation on Innovation”, Manchester Institute of Innovation Research, 2012, http://research.mbs.ac.uk/innovation/
[100] J. Pelkmans, A. Renda, “How Can EU Legislation Enable and/or Disable Innovation”, European Commission, 2014
[101] A. Alesina, M. Battisti, J. Zeira, “Technology and labor Regulations: Theory and Evidence”, NBER Working paper 20841, 2018, http://www.nber.org/papers/w20841
[102] P. Aghion, A. Bergeaud, J. Van Reenen, “The Impact of Regulation on Innovation”, IZA Institute for Labor Economics, 2021