2.3.3 MiCA cannot provide a high level of consumer protection
-107. I am returning to C. Koopman’s testimony in front of the JEC of the US Congress. After mentioning the undesirable outcome of “innovation arbitration”, he clarifies: “There will always be serious and legitimate concerns that make it tempting to require innovators to seek approval before they proceed. And while this may address many of these concerns, it is done at the expense of continued innovation and economic growth. And we should all be mindful of the effects that decisions made today will have on tomorrow’s innovators and entrepreneurs.”
-108. Indeed, MiCA Recital (75) states: “This Regulation should not affect the possibility for persons established in the Union to receive crypto-asset services by a third country firm on their own initiative.” This is called “reverse solicitation” and basically offers an arbitrage opportunity to would-be entrepreneurs: either establish an EU company and suffer under the burden of complying with MiCA or leave the EU, establish a company in a third country and rely on reverse solicitation to register EU customers. If innovators and entrepreneurs establish their start-ups and create compelling products and services that entice EU consumers to solicit them, MiCA will not be able to protect them and would fail in its third objective too.
-109. To illustrate, let’s look at 2022, which was a particularly bleak year for consumers of crypto services all over the world. In May 2022, TerraUSD, an algorithmic stablecoin with a flawed economic mechanism design, succumbed to a market attack and de-pegged. At that moment, TerraUSD was the fourth largest stablecoin in circulation with a total market value of about 18 billion USD. Anecdotic evidence indicate that many EU consumers of crypto services held TerraUSD at the time of its collapse. Yet had MiCA been in force at that time, being a dollar-denominated stablecoin, it is unlikely that TerraUSD had been regulated by it.
-110. TerraUSD’s collapse in turn sparked a domino effect and led to the failure of several significant asset managers, such as 3AC and Voyager. Contagion spread to a consumer-oriented business, Celsius, which had 1.7 million direct customers and presumably more through resellers of their “crypto-earn” products, such as Nuri, a German FinTech. Had MiCA been in force, it would have covered Nuri but could not have prevented its bankruptcy, as it would not have covered Celsius, who would have almost certainly never registered as a CASP.
-111. Later the same year, another crypto-exchange, FTX, collapsed due to fraud. FTX was based in the Bahamas and thus it would not have been covered by MiCA.
-112. In other words, the costly requirements MiCA imposes on EU crypto-assets and CASPs could not have prevented the collapses of the TerraUSD crypto-asset, and neither those of Celsius nor FTX (both CASPs). And whatever EU customers these have had, MiCA would not have protected them.
-113. Moreover, because the same rules apply to both good and bad crypto-assets and firms, MiCA will be hindering the access of EU consumers to the good products and providers who will be discouraged from setting up in Europe due to high costs and regulatory uncertainty, as underscored in the previous chapter.
-114. To sum up, in light of its aim of driving the digital revolution “with innovative European firms in the lead […] while ensuring a high level of consumer protection and market integrity in crypto-asset markets”, MiCA provisions strike me as doubly self-defeating: on one hand, they impose a significant burden on innovators thus indirectly inviting them to “go where they are welcome” (“innovation arbitrage”); on the other hand, as the likely result will be that EU consumers will be enticed to solicit crypto-related services from non-EU entities, they will have more difficulty in accessing the good products and services and will not benefit from a high level of protection from the bad products and actors.
Concluding remarks
-115. In Part 1 I explained that MiCA would not have existed if not for Bitcoin’s success, and that blockchain technologies and crypto-assets, among which Bitcoin is the archetype, innovate on three levels, which I dubbed “Schumpeterian”, “Coasian” and “Northern”. I have also underscored that the “Schumpeterian” innovation avenue, in the case of crypto-assets, owes its existence to the “Coasian” and / or “Northern” innovations.
-116. Subsequently, in Part 2 I analysed the MiCA regulation and highlighted its “original sin”: failing to acknowledge that when regulating, difficult trade-offs need to be struck, notably between “innovation” and “consumer protection”, and that good regulation, which doesn’t stifle innovation, cannot be taken for granted and requires a conscientious effort. In this context, the rather shallow grasp of the technology, which the initial Commission Proposal displayed, appears striking.
-117. I argued that the reality of this trade-off is stressed by no others than the lawmakers of the most successful global innovators, the United States of America, who state that “the only way” to “support innovation”, also one of MiCA’s main objectives, is for lawmakers to leave “consumer protection” in the hands of consumers themselves and address failures and mistakes ex-post, rather than attempting to prevent them ex-ante through regulation.
-118. I emphasised the fact that EU legislators chose to go against both the theory and US legal doctrine on “supporting innovation” despite Europe’s acute need for technological innovation, mediocre record on the topic in the past decades, and despite the demonstrated dampening effect of regulation on innovation, underlined not only in recent quantitative studies and meta-studies by academics, but also in the EU Commission’s own studies.
-119. I proceeded to first analyse the general concepts of MiCA: objectives, definitions and scope, and rules. I concluded that its objectives are not consistent and that its provisions casts doubt that they will be reached. That, furthermore, MiCA remains insufficiently specific, thus undermining its “legal certainty” objective, consistently discriminates against blockchain technology, favours the incumbent financial firms, and that the generated costs and regulatory uncertainty are likely to deter innovators from setting up in Europe.
-120. I then analysed MiCA in more detail with the eye of an experienced blockchain and crypto-asset practitioner and argued that, despite its stated objectives, its provisions are effectively forbidding “Northern” innovation in Europe, just as social scientists that I quoted in Part 1 had predicted it would.
-121. It is also seriously hindering “Coasian” innovation, as economists predict it would happen especially in cases of “regulatory capture”, in its broad sense. That economic policy might not always stem from a benevolent planner with a view to the public interest has long been documented in legal and economic literature since a seminal 1971 article by G. Stigler.
-122. By forcing “innovation arbitrage”, MiCA is unlikely to be able to ensure a high level of consumer protection. Indeed, with few European firms to choose from, EU consumers will likely procure, at greater cost, risk, and with greater difficulty, USD-denominated crypto-asset services from non-EU companies.
-123. By comparing the original Commission Proposal with the final version I have also underscored the very inadequate understanding of the domain apparent in the September 2020 version, the improvements brought by the “ordinary legislative procedure”, as well as the competence gap that still remains.
-124. In Part 3 I argue the “opposite corner”, trying to investigate how MiCA could nevertheless bring some benefits.
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[157] A. Briola, D. Vidal-Tomas, Y. Wang, T. Aste, “Anatomy of a Stablecoin’s failure: The Terra-Luna case”, Finance Research Letters Vol. 51, 2023
[158] J-J. Laffont, J. Tirole, “A Theory of Incentives in Procurement and Regulation”, MIT Press, 1993
[159] E. Dal Bo, “Regulatory Capture: A Review”, Oxford Review of Economic Policy, 2006
[160] G. Stigler, “The Theory of Economic Regulation”, Bell Journal of Economics and Management Science, Vol 2, No. 1, 1971, p. 3-21