Tag Archives: cryptocurrency

The Future of Digital Assets in the EU 

Many people have long seen the market for digital assets as the Wild West of investing, filled with lucrative volatility and a significant risk of fraud. However, the European Commission’s Markets in Crypto-Assets (MiCA) is a regulatory framework that seeks to change this. MiCA is due to come into effect in 2024 with the dual objectives of harmonisation of existing EU regulations and the protection of investors.

One of the key impacts of this new framework will be to broaden the scope of existing regulation to include additional Virtual asset service providers (VASPs). Owing to the market’s rapid development, many service providers are unregulated, putting investors at risk of exploitation. Crypto-asset service providers (CASPs) is a term that exists in many other jurisdictions and has now been adopted by MiCA’s drafters to replace the Financial Action Task Force’s well-known definition for VASPs. The CASP definition is very similar to the original definition however it is much broader in scope so as to provide for as many crypto-related entities as possible. The most important thing to understand is that all VASPs will be considered CASPs but not all CASPs will be VASPs as they will fall outside the previous, narrower definition.

VASP definition:

  1. Exchange between virtual assets and fiat currencies;
  2. Exchange between one or more forms of virtual assets;
  3. Transfer of virtual assets;
  4. Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
  5. Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

CASP definition: 

  1. The custody and administration of crypto-assets on behalf of third parties; 
  2. The operation of a trading platform for crypto-assets; 
  3. The exchange of crypto-assets for fiat currency that is legal tender; 
  4. The exchange of crypto-assets for other crypto-assets; 
  5. The execution of orders for crypto-assets on behalf of third parties; 
  6. Placing of crypto-assets; 
  7. The reception and transmission of orders for crypto-assets on behalf of third parties;
  8. Providing advice on crypto-assets;

MiCA will also regulate the digital assets which currently fall outside the scope of EU and Member State regulations, such as e-money tokens, asset-referenced tokens and utility tokens. Surprisingly, MiCA does not address non-fungible tokens (NFTs), although the European Commission has indicated that it will address them in the future.

When MiCA comes into effect it will be applicable across the EU, without requiring Member States to introduce implementation laws. This uniform approach will bring about greater clarity and certainty for CASPs who are currently faced with differing domestic regulations across Member States. For example, MiCA will streamline the licensing process for crypto-asset issuers and make it valid across all Member States. 

Notwithstanding the greater ease of doing business, the regime itself will impose stricter obligations on CASPs so as to protect investors from market abuse and ensure transparency. These obligations relate to the authorisation of issuers and the marketing of crypto-assets themselves, as well as the requirement to publish reports and whitepapers. However, issuers that operate on a smaller scale will be exempt, such as those that deal with less than 120 investors per Member State. 

While some CASPs may be sceptical of MiCA’s impact on their business models, the Commission anticipates that the increased protection will attract investors. For example, CASPs involved in the custody of digital assets (custodians) will be required to store their customers’ assets separately to their own data, using Distributed Ledger Technology (DLT). This will ensure the assets are more secure in the event of a malware attack. Furthermore, these custodians will also be liable for losses that result from hacking or break down in technology. These requirements will undoubtedly increase consumer confidence and thus stimulate investment. 

Finally, it is interesting to note that because the safeguards relate to EU consumers, these changes will also apply to any firms outside the EU who wish to do business in the EU. Therefore, MiCA will have far-reaching implications for both CASPs and investors in the digital assets market not just in the EU but around the world. As Dublin is one of the world’s investment fund and asset management hubs it will be interesting to see what opportunities and challenges arise as a result of MiCA.

Ethereum Upgrade “Merge” Represents a Shift Forward in the Future of Cryptocurrency and Blockchain

Since the formulation of Bitcoin in 2009, the ground-breaking idea of using blockchain to generate what is now known as “cryptocurrency” has attained a level of popularity, even in the face of tremendous volatility, that detractors could never have imagined. Ethereum was first conceptualised in 2013 and brought to life in 2014 by programmer Vitalik Buterin. The cryptocurrency was founded not as a currency in itself, but as a platform with a goal to fully decentralise the internet. Since its formation, Ethereum has grown to earn its position as the second-largest cryptocurrency in the world with a current market cap of $163.28bn, despite a recent but steady fall in price of 66% from annual highs. 

Although Bitcoin and Ethereum are quite different with regards to their structure and capabilities, they have faced common criticisms by both observers and users alike. “Proof-of-work” is the decentralised mechanism used by both whereby members of a network solve arbitrary mathematical problems that use massive amounts of computing power for mining new tokens and validating transactions. The total consumption of energy needed to fuel this computing power has been condemned. According to estimates, Bitcoin alone consumes as much energy as Poland. In the face of climate change and energy shortages, there has been increased pressure on governments and corporations to disincentivise the growth of such cryptocurrencies based on the system of proof-of-work. The White House proposed restrictions on proof-of-work mining earlier this month as a way to reduce energy consumption. 

These problems prompted Ethereum developers to reconsider the “proof-of-work” system and led to the proposal of a “proof-of-stake” upgrade to underwrite Ethereum. This project eventually led to the “Merge” that took place last Thursday, 15th September which went off without a hitch. The proof-of stake mechanism is based on the work of “validators” rather than “miners”. These validators are compensated modestly in return for their validation of transactions and collateralize their own cryptocurrency which deters dishonest or lazy work. Over 100 developers worked on the upgrade for years to ensure minimal risks for bugs and the new mechanism is estimated to cut energy consumption by the cryptocurrency by roughly 99.95%.

The upgrade will significantly reduce the quantity of Ether (Ethereum’s token) coming into circulation which may allow it to serve as a deflationary currency in the coming months. Ethereum may well become more accessible for institutional investors as corporations can no longer use the wasteful use of energy as an excuse to ban its use in portfolios. Institutions such as Bank of America have recently indicated that the upgrade may ease their current restrictive policy on Ethereum. Cryptocurrency advocates say the transition marks a turning point in the future of digital assets while critics argue that a number of challenges remain. While the “Merge” will accelerate the process of introducing upgrades and make Ethereum more efficient, it will still face the inherited problems of congestion and very high transaction costs. The proof-of-stake upgrade represents more than just a change in operating system. Proof-of-stake has now been proven to be a suitable mechanism for operating blockchain technology and will have broad implications for the innovation of digital assets in the future.