As I mentioned previously, I am working toward a master's degree in European law with the EIPA and the Université de Lorraine. I've got my first year degree (a French degree called "Maîtrise", corresponding to M1) and published the diploma here on Hive. For the second year, aside from written examinations, I also need to write a thesis.
This is a high-level outline of my master's thesis, which, unsurprisingly, is dedicated to analysing the upcoming "Markets in Crypto Assets" (MiCA) regulation.
The problem
Union's objectives
Art 3(1) TEU states that « The Union’s aim is to promote peace, its values and the well-being of its people »
Economic prosperity
There are several factors affecting the well-being of people, but all analyses indicate that economic factors are first and foremost: people’s financial situation, including income, wealth, and access to opportunities for betterment play a significant role in their overall well-being.
In support of this assertion, see for instance the “World Happiness Report”, this IMF study and many other studies and publications.
Innovation and economic prosperity
Technological innovation has always been one of the main engines of economic prosperity. Innovation leads to the creation of new products, processes, and technologies that increase productivity, improve the quality of life, and create new markets. This, in turn, drive economic growth and create new wealth.
According to the Austrian economist Joseph Schumpeter, innovation is the essential driver of long-run economic growth (see f.i. « Innovation and Growth from a Schumpeterian Perspective », Revue d'économie politique, 2018/5 (Vol. 128), p. 693-711.)
Big companies, innovation and prosperity
When it comes to innovation and growth, big firms and they location matter. Big firms have ample resources and can invest more in innovation than smaller sized firms. More importantly, big firms have more market clout and an ability to extract profits which represent a redistribution of the economic value created, from the consumers to the firm’s headquarters and shareholders.
In highly competitive industries such as information technology, large firms invest a significant portion of their revenue in R&D to maintain their competitive edge. More worryingly, large firms also have the financial “firepower” to buy out those innovative start-ups which they perceive as a threat, as has been oftentimes illustrated in the past decades.
Corporate Europe has declined in the past decades
In terms of large firms, as defined by market capitalization, revenue and other typical financial indicators, the share of Europe has continuously declined in the last decades.
This is especially true in technology: “Tech firms comprise a quarter of the global stockmarket and the geographic mix has become strikingly lopsided. America and, increasingly, China are ascendant, accounting for 76 of the world’s 100 most valuable firms. Europe’s tally has fallen from 41 in 2000 to 15 today.”
Hosting the headquarters, being the home of large firms becomes even more important as globalization, once on the march, seems to be unwinding: “As globalisation unwinds, rows are already erupting over where multinational firms produce vaccines, set digital rules and pay taxes.”
There was a time when Europe was happy to swap its luxury bags for Chinese computer chips. The recent “Chips Act” tends to indicate that the European decision makers have recognized, if belatedly, that in an era defined by advances in computer technology, such an arrangement leaves it dangerously dependent on a “strategic competitor” and a “systemic rival”.
Yet “realizing” its decline is not the same as having a solution to reverse it. In a piece from 2018 The Economist called Europe “the digital desert” and proceeded to state “Europe’s history explains why it will never produce a Google”
Crypto assets and blockchain technology
Crypto assets, also known as cryptocurrencies or digital assets, are one of the most prominent technological innovations impacting the financial domain. They use cryptography and an innovative distributed IT system, commonly labelled “blockchain”, as a ledger (hence the other, generic name "distributed ledger technology" or DLT) for recording the ownership of digital tokens. Unlike existing financial assets, most crypto assets (though not all) are “decentralized”, meaning they are not issued or controlled by any central authority like a government or financial institution.
Unlike previous waves of technological innovation, the emergence and increasing popularity of crypto assets challenges existing social and political arrangements. It has been observed that, thanks to them, “decentralised groups of people can do risky, contentious and important things”.
In an article from several years ago, I observed that “public, permissionless blockchains, such as bitcoin and Ethereum [and their native crypto assets] have […] shown that random, anonymous humans can be brought together to co-operate not only by a legal framework, which institutionalises the fear of not complying (and triggers reflexes of avoidance), but also by the power of economic incentives.”.
As the “legal basis” chapter of MiCa observes, before this regulation, cryptoassets operated in most Member States outside any regulatory regime – which is astounding and unprecedented: a whole industry evolving and growing without any need to rely on a legal framework.
In the financial domain, an IMF paper found that the marginal costs of financial intermediation by DeFi apps were about a third as much as rich-country banks and a fifth of emerging-market banks.
While cryptoassets are a hotbed of innovation, they are also a source of financial and consumer risks. In its explanatory memorandum, the soon-to-become-law “MiCA proposal” elaborates: “provisions in existing EU legislation may inhibit the use of DLT” and “most crypto-assets fall outside the scope of EU financial services legislation and therefore are not subject to provisions on consumer and investor protection and market integrity”.
MiCA Regulation
Markets in Crypto Assets is a new regulation expected to enter into force later this year or early 2024. It states the following aims:
1.legal certainty
2.support innovation
3.consumer protection and market integrity
4.financial stability
MiCAR reckons that “it is crucial for Europe to reap all the benefits of the digital age and to strengthen its industrial and innovation capacity” and also aims at “positioning Europe at the forefront of blockchain innovation and uptake.”
MiCAR’s approach to reaching these aims is by fully harmonising operational requirements for service providers as well as the disclosure requirements imposed on issuers, and creating a dedicated and coherent regulatory and supervisory regime at EU level.
MiCAR recognizes that the regulation imposes costs on existing and to-be service providers and issuers, as well as on supervising authorities, which are supposed to recoup their costs from the issuers and service providers (thus further increasing the financial burden on the former).
Objective of the thesis
I argue that, when seen in a global context, one of the possible outcomes of MiCA could be that new, innovative start-ups and scale-ups in the field of blockchain technologies and crypto assets will choose to avoid the EU, and instead incorporate and develop in other, less costly jurisdictions.
Only the bigger and most successful of these new firms shall, when already well established and highly profitable, come to offer their services on the EU internal market, at a point when the extra regulatory costs imposed by MiCAR will be manageable for them.
If this outcome plays out, as it is likely, it will mean that the next “Amazon” or “Google” of crypto assets will, once again, not be an EU company.
However, on the positive side, the EU still has powerful financial companies who could choose to seize the opportunities created by MiCAR and enter the market for crypto assets the same way as, say, European car manufacturers are now entering the market for electric vehicles.
Therefore, the question this thesis aims to explore is: what could be one or more scenarios in which MiCAR might be able to live up to its stated goals of allowing Europe to “reap all the benefits of the digital age and to strengthen its industrial and innovation capacity” and position Europe “at the forefront of blockchain innovation and uptake”?
The way I propose to do that is by combining the analysis of the proposed regulation with insights from the economic, social, political and organizational sciences. Thus the approach will be predictive and essentially qualitative.