2.1.2 MiCA’s regulatory context
-15. In its “FinTech Action Plan” published in March 2018 the EU Commission notes that FinTech, a domain which includes the crypto-assets, “increases further the competitiveness of the EU economy”, is “important for the Capital Markets Union”, and “creates opportunities for FinTech-based solutions to provide better access to finance and to improve financial inclusion for digitally connected citizens.”
-16. Then, in almost “the same breath” it notes that FinTech also presents challenges such as “cyber-related risks, data, consumer and investor protection issues and market integrity issues.” However, it stops short of acknowledging that a trade-off between “embracing FinTech” and “mitigating associated risks” exists and leaves the impression that doing both at the same time is merely a technical, rather than a political and ideological challenge.
"The essence of strategy is choosing what not to do" Michael Porter (Photo : Damian Siodłak on Unsplash)
-17. Prior to the Commission’s proposal for a regulation on Markets in Crypto-Assets, the EU regulation of financial security markets was chiefly governed by MiFID II. MiCA was proposed as part of a Digital Finance Package of measures “to further enable and support the potential of digital finance in terms of innovation and competition”, which, in light of the findings presented in the previous section concerning the potentially inhibiting effort of regulation on technological innovation, appears as a highly fraught endeavour.
-18. The package included a new “Digital finance strategy for the EU”, which warrants careful consideration. The father of business strategy, Michael Porter, famously said “The essence of strategy is choosing what not to do. Without trade-offs, there would be no need for choice and thus no need for strategy.” Yet in the Commission’s document no trade-offs are mentioned, no “negative priorities”, no potential drawbacks.
-19. I am going to highlight several key aspects in this strategy document which tend to indicate that the regulatory approach sits on unsound intellectual grounds.
-1. The Commission states that “Digital technology will be key for relaunching and modernising the European economy across sectors. It will move Europe forward as a global digital player. At the same time, users of financial services must be protected against risks stemming from increased reliance on digital finance.” The choice of “at the same time” seems to indicate that the Commission refuses to acknowledge the fundamental trade-off between innovation, which implies risk taking, and protection against risk, which hampers the speed and breadth of innovation. The approach strikes as an instance of almost magical, “eating the cake and having it too” thinking. The contrast with the approach taken by the American and UK legislators, which I am going to highlight in the next section, could not be starker.
-2. Further down, the Commission explains that its approach has been informed by “responses to public consultations” and “outreach events” and the report of “the expert group on regulatory obstacles to financial innovation", among others. This seems to point to a “democratic” approach to innovation, which, innovators and entrepreneurs argue, is naïve and ill-informed. Indeed, innovation is almost by definition non-democratic and cannot be done by committees, public consultations and “expert groups”. The famous quote from Henry Ford (probably apocryphal but very symbolic nonetheless) immediately comes to mind: “If I had asked people what they wanted, they would have said faster horses.” Closer to us, it is hard to imagine Steve Jobs inventing the Apple II, the MacIntosh or the iPhone as a result of a series of “public consultations”. Most importantly, justifying decisions on this basis is fatally wounding innovation as there is never anyone present to speak out in “public consultations”, “outreach events” and “expert groups” on behalf of the as-yet-unborn European start-ups, and there are powerful voices and interests trying to defend the status quo. It should nevertheless be stressed that the budding global crypto-asset industry has done its best to make its voice heard and, gathered under the banner of “INATBA” (International Association for Trusted Blockchain Applications) has raised serious concerns, which I will echo in my further analysis. Yet the biggest concerns were not addressed by the legislator. INATBA was consulted … and its opinion largely ignored.
-3. The strategic objective of the Commission is said to be “to embrace digital finance for the good of consumers and businesses” and includes the exhortation: “Europe must drive digital finance with strong European market players in the lead”. It is developed across four priorities and details what the Commission will do in each of them (“key actions”). Probably the most troubling statement is to be found in the “fourth priority” where the Commission commits to paying “particular attention to the principle ‘same activity, same risk, same rules’ not least to safeguard the level playing field between existing financial institutions and new market participants”. While natural at first reading, this sounds ominous upon further reflection. Indeed, who is to decide that innovators engage in the “same activity”? And if we argue about innovation, who will then decide that the “same risks” arise? Thus, this principle could be read as a commitment from the Commission to submit resource-deprived start-ups to the same regulatory hurdles as the big, rich, established firms, thus protecting these incumbents against disruptive innovation.
-20. In Part 1, par. 34, I was quoting Acemoglu and Robinson arguing that for innovation to contribute to prosperity, institutions should “encourage and allow the entry of new businesses that can bring new technologies to life.” It is difficult to conceive of a more contrarian stance than having the EU Commission commit to protect the incumbent firms against innovative new businesses. Yet in practice this is precisely what MiCA sets out to do, as illustrated further. Whereas the “same activity, same risk, same rules” principle did not figure explicitly in the initial MiCA proposal, it found its way in the final version in Recital (9).
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[103] European Commission, Fintech Action Plan, COM/2018/109 final
[104] Directive (EU) 2014/65 on Markets in Financial Instruments
[105] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on a Digital Finance Strategy for the EU, COM(2020) 591 final
[106] M. Porter, “What is strategy”, Harvard Business Review, 1996
[107] INATBA POLICY POSITION ON MARKET IN CRYPTO-ASSETS (MICA) REGULATION, 2021, available at https://inatba.org/policy/inatba-mica-policy-position/
[108] D. Acemoglu and J.A. Robinson, op. cit., p.77