Part 3 Advancing the European project with blockchain and MiCA

1. In Part 1 I looked at the objectives of the EU and offered an analysis of how blockchain innovation can contribute to reaching them. I stressed that:
   • Attempting to analyse and understand blockchain technologies and crypto-assets has to proceed from the success of Bitcoin and the emergence of the “cryptoverse” rather than from a narrow look at the underlying technology.
   • The main sources of innovation are at the institutional level (which I called “Northern” innovation) and at the “transaction cost” level (which I called “Coasian” innovation) rather than at the “productivity” level (“Schumpeterian” innovation).
   • Social sciences predict that existing state-based institutions are bound to try to discourage, suppress or downright ban “Northern” innovation. I quoted Michael Taylor observing that “The state, then, has […] tended to exacerbate the conditions which are claimed (in the liberal theory) to provide its justification and for which it is supposed to be the remedy. It has undermined the conditions which make the principal alternative to it [communities, n. ed.] workable and in this way has made itself more desirable.”

2. In Part 2 I have analysed the EU decision to regulate crypto-assets and the resulting MiCA under three different angles:
   • How the political and regulatory doctrine of Europe compares with that of the US (and glanced briefly at the UK and China).
   • How consistent and coherent the Regulation is, i.e. how the actual legislative provisions contained in the Regulation match the stated principles and objectives.
   • How effective the provisions of the Regulation appear at identifying and supporting the specific innovative aspects of blockchains and crypto-assets as described in Part 1.

3. Whenever relevant, I have also pointed at elements of the European legislative process by contrasting some of the formulations from the initial Commission Proposal (September 2020) with their updated versions in the final act, adopted by the European Parliament in April 2023 and endorsed by the Council in May 2023.

4. The conclusions were not optimistic. The initial Commission proposal was woefully inept and, despite marked improvements, the final version still falls short of truly understanding the matter it regulates. The text displays severe inconsistencies between the professed objectives and the means deployed, and appears to employ Orwellian “doublespeak” in order to cover a coordinated attempt by the regulators and incumbents to prevent disruptive innovation while claiming the opposite. I inquired whether this can be attributed at least partly to efforts by incumbents to lobby the legislator in order to prevent or neuter “Coasian” innovation that might threaten their “economic rents”.

5. In Part 3, the last of this thesis, I take a different angle and highlight some feature that could somewhat “redeem” MiCA.

6. In the first chapter I will review the accusations levelled at crypto-assets and blockchain technologies and indicate how MiCA addresses them, concluding that the Regulation benefits greatly to crypto-assets as it indirectly legitimises the asset class and offers a set of obligations against which to assess compliance and grant discharge.

7. In the second chapter I look at how MiCA could facilitate traditional financial institutions and public actors deploying crypto-asset innovation for their benefit and the benefit of European citizens.

8. In the third chapter I explore additional scenarios, the first, of enterprise blockchain systems facilitating smaller European firms aggregating into consortia, which would be more beneficial to the EU but is less likely, and the second, of the “third-country innovator” expanding to Europe, which, with the hindsight of GDPR, is highly likely and would reproduce the same pattern that saw Europe become “the digital desert” and the “corporate also-ran” that it has regrettably become.

Chapter 3.1. MiCA legitimises the crypto-asset class

-9. Crypto-assets and, to a certain extent, blockchain technologies have generated both enthusiasm and significant criticism and controversy. Much of the criticism can be said to be either ill-informed or downright disingenuous, aiming at discrediting the innovation on purpose, to protect the interests of the incumbents. Crypto-assets and blockchain have an obvious political dimension and some criticism stems from an assumed ideological position. Against all those criticisms, MiCA’s contribution should not be underestimated. Indeed, some of the MiCA provisions which are cast in an unflattering light in Part 2 were likely inserted in response to such criticisms. In this chapter I’m going to analyse how MiCA supports crypto-assets and blockchain technology against the critics, thus lending it legitimacy at Union level.

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3.1.1. Blockchain controversy

-10. I have explained in Part 1 that “blockchain” is not a first-order concept. Initially coined in a process of reverse-engineering the determinants of bitcoin’s success, it has become an umbrella term with a fuzzy contour, therefore readily attackable from various angles, the best known of which are listed hereafter. The process of crafting of the MiCA Regulation has, along with other efforts, contributed to address some of these criticisms.

• “Blockchain consumes too much energy and is therefore bad for the climate / the planet” – probably one of the oldest tropes of the critics. Climate change is indeed widely considered to be the biggest challenge facing humankind in the near future. Climate change is caused primarily by “greenhouse gases” (GHG) emitted as a consequence of human activity, mostly energy production (burning coal, oil or gas to generate power). Since the “proof of work” (PoW) consensus mechanism used by Bitcoin consumes significant amounts of energy, and assuming a static energy mix, we are led to believe that Bitcoin “mining” causes more GHG emissions than otherwise. There are several elements of faulty logic in this argument, which have all been debunked in detail. First, it should be noted that energy is very abundant: the Earth surface receives from the Sun in an hour about the same amount of energy that humankind is using in a year! Thus the mere fact of “consuming energy” is not necessarily relevant as in market economies more consumption stimulates investment and an increase in energy production. Second, assuming a static energy mix is fatally shortsighted as the fight against climate change is rooted in the idea that humankind can continue to live prosperously and avoid catastrophic warming if it increases its energy efficiency and changes its energy mix. The alternative vision of a deliberate decrease in standards of living (“degrowth”) is an eminently political debate which is outside of scope here. Third, although early blockchain-based crypto-assets were largely copying the Bitcoin’s energy-intensive PoW consensus, subsequent blockchain systems have opted for sober consensus mechanisms such as “proof of stake” (PoS) and a milestone has been achieved when, in September 2022, the second most popular blockchain, Ethereum, completed its transition from PoW to PoS. As “The Economist” observed shortly before “the merge” went live, “The effect on emissions will be as though, overnight, Chile had been switched off”. Fourth, I explained that Bitcoin’s energy consumption is inextricably linked to its “censorship resistance”. When many other blockchains function using a non-energy intensive consensus, the implicit price they pay is lower censorship resistance; the reason behind Bitcoin’s consumption are the lessons learned from “The Troubling Suppression of Competition from Alternative Monies: The Cases of the Liberty Dollar and E-Gold” (see Part 1, par. 82), and observations rooted in the findings of Michael Taylor about the state’s destructive behavior toward stateless forms of collaboration. Such behavior has been illustrated by a recent, very aggressive attack of the SEC, an US regulator, against the two biggest global CASPs, Binance and Coinbase, on the basis of securities legislation dating from the Depression era . It is essential to realize that if the laws of our states were updated to accommodate the concept of uncoerced, incentive-based cooperation between non-legal entities (i.e. the main “Northern” innovation I describe in Part 1), Bitcoin might not need to fear state “censorship”. Fifth, given the wide variations in renewable energy generation and the difficulties in storing energy - which lead for instance China to waste, through “curtailing”, the equivalent in hydropower of Switzerland’s total energy production-, the concept of using Bitcoin as an “economic battery” has been developed, in which the incentives of Bitcoin mining are harnessed to speed and smooth out the energy transition to renewables. Whereas the original Commission proposal did not address the issue at all, MiCA’s final version includes Recital (7) which mandates ESMA and EBA to develop standards for monitoring and reporting on “key energy indicators” and “potentially adverse impacts on climate”.

• “Blockchain being immutable, it cannot be compatible with the ‘right to be forgotten’ of the GDPR.” In an era when “Data is the new oil” , the General Data Protection Regulation stands out as one of the most advanced pieces of legislation the EU has enacted. To analyse the interplay between GDPR and blockchain, in the EU “civil law” system, it is paramount to identify and give utmost consideration to the “spirit of the law”, which is best expressed in the Recitals. GDPR Recital (2) states that the regulation is intended to contribute to the “accomplishment of an area of freedom, security and justice and of an economic union, to economic and social progress, to the strengthening and the convergence of the economies within the internal market, and to the well-being of natural persons”. GDPR’s Recital (4) expands: “The processing of personal data should be designed to serve mankind. The right to the protection of personal data is not an absolute right; it must be considered in relation to its function in society and be balanced against other fundamental rights, in accordance with the principle of proportionality. This Regulation respects all fundamental rights and observes the freedoms and principles recognised in the Charter as enshrined in the Treaties, in particular the respect for private and family life, home and communications, the protection of personal data, freedom of thought, conscience and religion, freedom of expression and information, freedom to conduct a business, […].” In an in-depth legal analysis of the interaction between blockchain and GDPR, Ibanez, O’Hara and Simperl distilled this to a “particular emphasis [of the legislator] on reducing the power asymmetry between organisations that manage and exploit personal data, and the individual to which these data belongs.” Indeed, GDPR was Europe’s response to what many Europeans were perceiving as unfair exploitation of their personal data by the big internet platforms (Google, Apple, Facebook, Amazon, Microsoft, etc.). It should be observed that this power asymmetry does not exist or is greatly alleviated in a decentralized setting: permissionless blockchain platforms are community systems where everyone can be both an “owner” and a “user” and the decision-making is diffuse, unlike in classical “for profit” entities. Moreover, as Ibanez, O’Hara and Simperl observe in their conclusions, blockchains, in their original, public permissionless form, share with the GDPR “the motivation of empowering individuals and reduce the asymmetry between them and the organisations that process their data and their transactions.” In this respect, by forcibly mandating the introduction of the “legal person” concept in new crypto-asset undertakings (see Part 2, par. 82), MiCA sows the seeds for a power asymmetry to appear, shifting a delicate balance in an undesirable direction. It must also be stressed that a blockchain is only as immutable as its community of validators decide it to be. Immutability is not an intrinsic feature of the technology, but rather results from the impracticality of coordinating a change falling outside the scope of the consensus protocol, across more than half the validators, especially when these validators are striving to remain anonymous. The more there are independent validators for a given blockchain, the harder it is to get them to accept a modification. And if their level of anonymity is high, the difficulty increases further. At the farthest end of the difficulty range, two particular events illustrate conditions under which even the two blockchain archetypes, Bitcoin and Ethereum, the ones supposedly “immutable”, can or could nevertheless be modified. The best known instance concerns the 2016 “TheDAO” hack on Ethereum, which saw an anonymous hacker exploit a security vulnerability in a smart contract and siphon ETH contributed to it. As the hacker did nothing more than use the code as it was (specifically, use a bug left unnoticed by the developers), he did not break the “law of the code” (see part 1, par 111) and hence, in the peculiar “blockchain ethos”, he was doing “nothing illegal”. However, the main Ethereum backers of the time, including its inventor, Vitalik Buterin, assessed that the loss in confidence resulting from this exploit would be too great to bear, and they coordinated a “roll back” of the blockchain to a “block” located before the siphoning had started, in order to deploy a corrected version of the “TheDAO” smart contract and thus pre-empt the hack. In other words, when “push came to shove”, the supposedly “immutable” blockchain proved only “difficult, but not impossible to modify”. A second, less widely known situation affected the bitcoin blockchain a few years later, when Binance, the biggest global CASP had one of its wallets hacked and lost 7000 BTC to the hacker . Because of the outsized influence of Binance in the cryptoverse, a possibility existed that a majority of Bitcoin miners coordinate in order to force a “chain reorganization”, effectively rolling back the Bitcoin blockchain to prevent the hack. Changpeng Zhao (CZ), Binance’s founder, made the opposite argument in that instance: he considered that rolling back the Bitcoin blockchain, although possible, would have dealt a heavy blow to its credibility as an “immutable” ledger, and decided to rather write-off the considerable loss, for the sake of Bitcoin’s reputation . While Bitcoin and Ethereum have tens of thousands of validators, most blockchains number in the hundreds. At the closest end of difficulty, a private permissioned blockchain is not necessarily significantly harder to modify than a classical centralized system, as the number of validators is usually kept low for efficiency reasons and all validators are known.

-11. To sum up, the two accusations most often levelled against blockchains stem from a superficial understanding of the technology and/or economics and law, and could also possibly be ideologically motivated. By setting information gathering and dissemination principles, MiCA contributes to protecting blockchains and crypto-assets from the first accusation. On the other hand, by indirectly encouraging the apparition of a power imbalance between backers of crypto-assets and their users, its contribution as concerns the second accusation is probably counterproductive.

[161] M. Taylor, “The Possibility of Cooperation”, 1986, op. cit.
[162] L. Wren-Lewis, “Regulatory Capture : Risks and Solutions”, 2011, https://www.researchgate.net/publication/265962949_Regulatory_Capture_Risks_and_Solutions
[163] The Economist, 2018 Oct 13, op. cit.
[164] The Economist, 2021 June 5, op. cit.