EU Markets in Crypto-Assets (MiCA) with Seth Hertlein, Patrick Hansen, & Rebecca Rettig

Transcript

talking about the state of regulation in Europe not the US this time but in Europe this is a very relevant episode David because you and I have talked a lot about regulation in the United States it's not a topic that I like to think about very often but we we do talk about it from time to time in uh in bankless podcasts and especially recently we have hardly ever talked about what's going on in Europe just kind of passing comments I allocate about 10 of my brain to regulation because it's just like it's not fun to think about but sometimes you gotta this week is one of those weeks and most of that time is reserved for the regulatory state of the United States so we wanted

an update on what is going on in Europe and it actually sounds like David the lawmakers in the EU are doing their jobs actually looking at crypto somewhat objectively I think and proposing legislative Frameworks to help us move forward that is something that we don't have the luxury of in the United States and I want to find out more about that on today's episode but why don't you give us a tease who do we have on and what are we in for today yeah across the pond there's this thing called Micah markets in crypto assets which is the regulatory proposal a landmark regulatory proposal that is working its way through Europe and so we're going to talk about that because there is actual

progress being Made For Better or For Worse there's at least a conversation happening there are some wins there are some some losses and so we're going to talk about the nuances of the mica proposal in the EU but it's in stark contrast round to What's Happening Here uh in the United States where there doesn't really seem to be a conversation there just seems to be an onslaught so at least we have that jealousy to look forward to from our American standpoint we have three panelists on because this is a big conversation we have Rebecca redig who is the chief policy officer over at polygon lab started there as of a week ago so congrats Rebecca from the new position there's also Seth who is the VP of global head of policy at Ledger Ledger the hardware wallet company of course that everyone knows if

you did not know that it is a france-based company now you know and also Patrick Hansen uh director of EU strategy and policy at Circle and so these people combined probably know as much as there is to know about the state of crypto digital asset regulation in the European Union and so we are going to get up to speed with what is going on across the pond as it relates to digital asset regulation and what can we really learn from the actual progress that's actually happening at least somewhere in the world if not the United States and I you know I could comment further but I don't think we should David I think maybe uh us dumb Americans should just um stop commenting and bring on our guests and we're about to do that but

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Ledger below Seth in the bottom right corner of your screen we got Rebecca reddig who is the chief policy officer at polygon Labs Rebecca congrats on the new position and then in the bottom left corner we got Patrick Hanson who's the director of EU policy and strategy at Circle Seth Rebecca and Patrick welcome to the show thank you guys so much for being here thank you yes thanks so much for having us and for touching that topic of you regulation yeah and so just to really kick things off here uh Ryan and I are gonna be Dunces when it comes to this so we're really looking to you guys to really help us understand what's going on here uh and so Rebecca just picking one of the three I'll start with you uh the state of crypto recreation in the United States is kind of a mess uh how's

it going across the pond it's going much differently in the EU um I think we have to take it back to where Mika really started um this really grew out of the introduction of DM slash Libra back in 2017 and I think real work started to be done on Mika in about 2018. and you guys say Mika not Micah excuse me I don't know maybe Patty will correct me but what is the right pronunciation give it to us I've always I've always said Nika Mika all right I also say Mika because it's markets in crypto assets ah consensus we're already making progress this is great yeah all right all right sorry for interrupting oh no no that's okay uh so it started back and and I think the concept really grew out of

Libra and thinking about how to regulate that type of stable client I think there was a similar type of um interest and concerns in the United States as well but it really spurred um the European Union to think about what types of regulations should come out um obviously it was just approved um by the Parliament and we should talk about the process of what happens in the EU this is very different uh than what happens in the US although I guess you can think of the member countries as the states and um the commission to be a much broader umbrella like we have in in the federal system in the United States uh but anyway um they built out this system where it really covers what are called casps um crypto asset service providers these

are centralized or C5 players so things like custody trading exchanges market makers and otcs investment advisors they're covered um by it as well as how you can do an issuance of tokens publicly and then there are some exemptions for private token issuances as well and it's really it attempts to be a very um comprehensive piece of Regulation but Seth and Patty should also sort of weigh in and talk about you know what we're building out here as well yeah Patrick any additional things add yeah sure so you know I think that's an important context that Rebecca brings up that you know that Mika really was the the European response to Libra and and

it actually goes a little bit deeper than that um which uh you know I think Paddock could probably speak to but there's there's the sense in in Europe particularly among policy makers that that Europe's sort of lost web too um you know that uh you know that all of sort of the web 2 Giants are you know well first American and then increasingly Chinese um you know the only one you maybe you could point to in in Europe is Spotify um and you know so there's this there's a sort of sense that that Europe lost web too and then when you know Facebook sort of the the big evil you know web 2 giant from the US announces uh you know Libra it really scared uh it really scared European policy makers that like

oh no we're gonna lose the next thing and you know so so Mika's you know there was a strong reaction to Libra in the U.S um you know I I was in Congress uh uh the day uh actually the building uh when uh when Zuck testified uh for the first time on on Libra and you know so there was a strong response in the U.S but I think it was it was much more uh palpable in in Europe uh sort of the threat that it posed and so uh you know policy makers immediately got to work on uh on Mika uh as a response to Libra and that's why it overwhelmingly focuses on stable coins to this day um but it sort of grew it frankensteined a little bit into other areas

um you know almost right up until the end um and and we can get into that a little bit later um you know but that's it's you know that's sort of the origin of of Mika uh and uh I think a lot of why it's sort of structured the way it is so Seth really quick just to double click on that point before we hear from Patrick on that so you're saying part of the impetus for this uh Mika legislation is actually the U.S wanting to not miss the next wave of the internet the EU yes I said the US not wanting to miss the next wave of the internet and so this was like a was this like sort of a well in in Europe our competitive Advantage will be Clarity and Regulation

and that's how we will win crypto innovation in the next phase of the internet in in our jurisdiction was that the approach and is that the strategy and is that sort of coming through yeah I mean there's there's a bit of a joke um you know that that you know Europe's uh or the eu's chief export is regulation um you know so I think uh and and you know there have been some speak uh speeches from you know from from high-ranking EU officials uh or from the from the European Commission in particular uh about about leading on regulation so that's that's absolutely a philosophy that um you know is is uh play here um and and I actually don't think in the specific case of of sort of Mika Libra I

don't think it's so much about um you know sort of not losing the next phase of the internet I think it was more a specific fear of Facebook um and um sort of a continuing the web 2 loss I don't think it had quite I don't think the opportunity of web3 had had sort of quite um you know gotten into the the political discourse yet um but but I'd love to hear Patty's thoughts on sort of how it developed yeah happy to I think to begin with it's important to note that Mika is really a comprehensive regulatory package for crypto so I think that's the main difference by the way with how things are currently planned um in the US where there is one regulation that is supposed to cover stable coins one regulation

that could Target crypto asset exchanges for example in Europe Mika is really I I sometimes refer to it as the one regulation to rule them all because it really covers all types of token offerings icos idos Etc covers all types as Rebecca mentioned all types of crypto Asset Services um so exchange custody brokerage advice Etc and it also covers stablecoin issuers and the operation of a stablecoin business and on top of that it also sets Market abuse standards for the entire trading space so it is one very comprehensive package in the EU that will be binding for all 27 U member

states so I think it's it it's very important to know that it's it's a milestone for for the EU crypto landscape because before Mika we had a patchwork of different National regimes Germany had its own licensing regime friends France had a different one and now with Mika coming into force it will be basically finally formally adopted in in April by the EU Parliament and then it will enter into application after an implementation phase there will be only that one harmonized binding rulebook yes although two important exclusions from Mika just for everybody D5 or fully decentralized systems has been excluded from Mika um DG fisma which is the Main Financial

regulator in the EU is doing a study and has been doing a study and engaging with industry in the D5 space for quite a long time to be able to think about how to even come up with Comprehensive regulation from D5 and then nfts are also carved out of Mika although they say fractionalized nfts or this idea of like a series of nfts so if they sort of become fungible and not that they're non-fungible anymore those are not carved but otherwise defy and nfts are carved out and hopefully we'll get into this concept of stable coins and the idea that elgo stable coins are not carved out of Mika oh okay yeah that that we want to earmark that that sounds like a a flag we want to mark but let me just make sure I've got some of the

facts straight so um this thing is our is kind of done Mika's is already done and you said it goes forward um it's going to be is it passed in in Parliament in April and then it gets implemented like are there any other approvals that need to happen are there any other potentials for this thing to get derailed or is this as good as done and what's the timeline for this yeah so essentially the content is done Mika has been approved by all the relevant committees in the EU Parliament and the Council of the European Union happy to dig deeper into you know how EU legislation works if you want to that's very different from how U.S legislation works and what's now missing is just a formal adoption vote from you know the

plenary session of the EU Parliament and then also from the ministers in the Council of the European Union but as mentioned it's only a former vote the content is already being translated into all the different official EU languages the content is a done deal and with regards to the timeline um so as mentioned that those votes those final form of votes are expected for April the text will then be officially published 20 days after that vote in in what is called the official Journal of the European Union and it officially basically becomes law but there are transitional implementation periods for service providers to implement those rules and those there is a 12 months so a one year

implementation period for stablecoin issuers like Circle and there is an 18-month implementation period for all kinds of servers providers like exchange exchanges and custodians so basically 2024 spring summer it will apply to stable coins and Autumn towards the end of 2024 it will apply to every every other basic company in the crypto space so I just want bankless listeners to to hear that that that's why we're having this this episode on mikas this thing's done and we really need to understand it and I think understanding this context will will help us understand maybe the rest of the the world's uh regulatory posture and maybe even including the us but this

thing is done it's moving towards the implementation phase and we have Hard dates 2024 uh of when this thing is going to to kick in for asking about the perspective of the United States um well I guess congrats for to the EU for getting something done um Rebecca also this one to you should we as a United States citizen should we feel jealous about Micah uh how do we what's our sentiment check over like how good we feel about Mike uh Micah as a whole um and David excuse me Mika excuse me I'm still I'm still learning here um do it do we enjoy the things that it has um maybe there are some wins some losses but at least the clarity is nice

like what's the sentiment what's the gut check about the value of Mika here I I think with all regulation there are some wins and some losses but I do think that and we can get into some of those right Diago stablecoin thing I think is a little more complex than you know having carved out defy and nfts um I do think it's a great example to look towards especially For What Patty said how comprehensive it is now it is about 380 pages and they were going to vote on it in February but because it takes so long to translate such a comprehensive bill into 27 different languages it's they postpone it to April but it does really cover things and it covers all the things we talk about in regulation like because you know how to custody something um notice in disclosure rules AML

um even things like sustainability and talking about environmental impact which we think a lot about safe keeping um the amount of reserves you need to have so all the different types of regulatory issues that we talk about in the U.S are covered by Mika and it has been I think even an example for other non-eu countries is overseas in this idea of let's regulate centralized doctors first and then continue to learn about these more novel applications um somewhat more crypto native and decentralized and then figure out how to build that out later because the UK I'll just say it briefly because I know it's not a UK based show but on February 1st the UK's Treasury Department put out a large consultation on crypto assets and

it very much mirrors what Mika looked like what Mika looks like it's shorter and it does let industry weigh in so if you're interested go look at it and weigh in on it um but it looks a lot like it and I think for whatever issues we may bring up or other people may have with Mika it at least sets a good precedent okay so it's comprehensive they've covered everything they've excluded some things that are somewhat uncertain which was heartening to me to hear you say earlier they're excluding nfts explicitly excluding defy thank God because I'm not convinced any legislator on the on the planet Actually I don't even think the crypto industry knows enough to to propose any sort of rule set for these things so it's it's too early to do that but um I think what uh what we'd love to know from our panelists today is like

overall you said there were trade-offs right nothing's perfect of course but like overall is this a win or a loss like if we were to give uh from the crypto natives here or the crypto Community a letter grade to this uh is this a b is this a c like what are we talking here and maybe it varies depending on kind of the categories like maybe it's a b in stable coins but uh maybe for like well maybe it's not for algo stable coins maybe that's like a d-minus or something I'm curious first your take on this uh give us some letter grades for for these categories to help us know where the wins and losses are Rebecca uh me to start on the letter grades um really putting me to the fire here

you guys um I'd say like an overall grade is probably a b b minus just because you know I think Algos are complicated I'm thinking about fractionalized nfts are somewhat complicated um but you know like definitely a for effort um um and I will say uh you know a lot of the European Regulators have spent a long time learning about some of the more complex and crypto native aspects here like defy and the like um so you have to give them credit for that even though you don't see it necessarily in Mika um I would say I'm actually fascinated to hear what Patty has to say about the asset classifications because they do have a different set of classifications for different types of crypto assets um and they're not as comprehensive as

um other types of um uh taxonomies and that I've seen so I'd give that maybe like a B minus as well um just because I think it's a little complex and it doesn't break out all the different types of crypto assets that we've seen as far as regulations for casps I think definitely a BB Plus um stablecoin issuers I'm going to leave the grade to Patty because I know the reserve requirements are very onerous so I think that's a little complex and then the last piece I say is on token issuances where you don't have an identified issuer that's pretty special and I'd say I'd give it a BB Plus because they do put listings and white papers about those tokens on the exchanges which I think is sort of the right shift of where the responsibility

sits Rebecca you were totally ready to give letter grades that was amazing uh thank you and just so we get the The Benchmark for the teacher assigning these grades right now um Rebecca so uh do you remember the thing going on the U.S this this proposed legislation called the digital Commodities consumer protection act if that doesn't ring a bell it for for bankless listeners it's the thing that SBF was real excited about a few months ago that got pretty far um what would be your score for something like that because I know my letter grade for that uh but what what is yours just so we have a benchmark of what you you know consider good or bad I think it's too hard to get I'm gonna give the lawyer answer I actually think

it's too hard to give a letter grade to the dccpa because it was never in a final form so it's pretty unfair to I'll give them definitely there was a lot of effort that went into that for sure but I think because we didn't see a final draft of it too hard for me to letter grade it well my uh the post that I read from Sam bankman free talking about how D5 front ends would all need to be registered at kind of a state level um to me that was pure nightmare Fuel and that is like I don't know if there's a grade lower than F uh in in any um in any Nation but um that that's what I would certainly assign that but the point is and I agree like conceptually I agree on that I think you know all regulations should really be activities

based that's how it works today that's how Mika is built out and all of these other types of things is really activities based um but at the same time like it was just sort of it wasn't final so to take away anything there is really tough Patrick I want to zero in on stable coins here uh and of course since you uh over at Circle I'm wondering if you could provide circle's opinion as to how good or not good Micah Mika's approach to stablecoin regulation is uh can you give your takes about how Micah relates Mika relates to Sable coins sure happy to I'm I'm not familiar enough with American grading levels so I try to avoid that but overall I think what is positive and and that is true also for the stablecoin

part that Mika sets a clear regulatory path right for those kind of issuers and for those kind of businesses um so essentially I think that's the first positive thing I want to mention and the second one is that it's one harmonized regulation so for stablecoin issuers if they issue a stable coin for example out of France or out of Germany they will be able to basically passport those Services into all the 27 EU countries so that's that's a major milestone for crypto asset businesses in the EU and if you dig a little bit deeper into the requirements I think there's a lot a lot that we essentially agree with within Mika so you know generally Mika allows also non-banks to issue stable coins also

so-called Imani institutions are allowed to do that that I think is a prerequisite for you know fostering Innovation and competition in that space it also sets important consumer protection standards through those white paper and information disclosure requirements it sets High bars with regards to the management of the reserve the backing Etc I think we we agree with all of that and it sets very high standards with regard to you know how how the business is is conducted and governed and I think that's that's all stuff we principles of of you know sensible stablecoin policy that we deeply agree with there are single requirements that um in in our opinion in in the opinion

of of many others could counter balance and counteract those benefits and it could stifle stablecoin innovation in in in the EU and I think we're all aware of for example those issuance limits based on for example a transaction amount and transaction volume of non-jero stable coins in the European Union it's important to note here that the exact scope of that provision is not yet clear EU supervisors so the European banking Authority which is going to supervise those big stable coin issuers it has still to publish and issue regulatory standards what kind of transactions will actually fall into the scope of that restriction

and we know for many policy makers that publicly stated that you know most of the investment trading transactions Etc should fall out of that scope the scope should be very very narrow in in nature and should only cover for example real world payments when I pay a merchant with the stable coin so I think the impact the negative the potential negative impact of that requirement depends largely on how that requirement is standardized and then there's a few other you know critical pieces where in our opinion Mika's success really comes down to the technical specifications of the supervisor one other example Mika Mika

um requires very onerous Prudential Capital buffer requirements for stablecoin businesses and in our opinion as you know a payment stablecoin issuer that is entirely backed by cash and cash equivalence so only short-term treasury bonds those additional Capital buffers are just not proportionate to the non-existing credit risk that we face and to the minimal Market risk so we think there needs to be more flexibility with regards to Capital buffers and and basically those businesses like ours that have essentially not no credit risk and very minimal Market risk should face no Capital buffers or very limited Capital Bus compared to for example a

business that holds corporate Bonds in the treasury and in the reserve and I think here again the supervisor still has to give us the exact technical guidelines of what it actually means what is a high quality liquid asset what does the capture buffer refer tools so hopefully there's still room for improvement on those fronts and is that something Patrick because I don't understand this process is that something that you think could be improved on the kind of the way it's implemented right or is the capital uh Capital buffer requirements for stable coin issues issuers already kind of set in the legislation and and you're just hoping for an amendment at some point in time that could be a very long process it depends on the exact requirement but

but on most requirements including the reserve management and the capital buffers there will be technical standards and guidelines to be published and issued by the supervisors so that's actually the caveat I know we already said you know Mika is set in stone Mika was already approved but Mika sets the political requirements when it comes to the technical implementation of those requirements those have to be specified by the supervisors and there's still room for you know interpretation and for improvement on on many of those points well yeah it's sorry go ahead Rebecca no and just about like a quick gloss on Patty's Point there's also EBA and esma who are you know two other EU type regulatory bodies and in addition to the country specific or member

state-specific regulations for implementation they're going to put out a set of sort of like regs that you will have that give a gloss over um what uh Mika sets out in terms of some of the more nuanced requirements as well okay and so it sounds like really The Stance here is that there's perhaps some frustration from Circle or other stable coin providers but that the capital requirements are more onerous than what they should be but perhaps to give them the benefit of the doubt like we can start by over uh asking and as the EU and other agencies become more comfortable with crypto they can start to pull back those requirements that seems like a reasonable place to start is that fair yet definitely I think it's it's I mean

it it's so great to have you know a clear regulatory path to just to comply with and there is still I mean as mentioned there's so so much room for improvement still Mika will also be revised then in one and a half years from now there will be a first report review of Mika saying you know this works well this works less well what should we change what could be added or and so I think Mika is obviously a first it is probably the first comprehensive regulatory framework for crypto Assets in the World published by a major Global jurisdiction um and it's you you don't get always everything right at the first draft right so there is room for improvement

for sure yeah well again to strike difference to what we're used to inside the United States the fact that there's paths forward again I'm very very jealous if there's one aspect uh that we that you uh talked about that I want to go back to uh Patrick um and I want to know how actually codified this is the notes that I have here is that uh Mike uh Micah limits the daily average number of transactions and trading volume of stable coins to 1 million dollars and 200 million in Euro I think these are the notes that I have and so there's restrictions on non-euro denominated stable coins inside of the EU as a result of of Mika uh is this just the EU trying to protect its own uh own denomination which I mean makes

sense from a nation state perspective is that really what's going on here yeah that actually that provision was added last minute into the legislative process by you know some member countries that were concerned um for monetary sovereignty reasons so they added that provision um we essentially believed that there were other means within Mika and within other Financial regulations that you know could have you know protected um monetary sovereignty and financial stability on that front and as mentioned earlier I think it it really comes down if you look at the specific wording of that provision it refers to transactions per day that are associated with users as means of

exchange and essentially you know the impact of that requirement comes down to what will the supervisor say what is a transaction that is associated with users as means of exchange if it is very narrow in scope I think you know there is there are ways for for stablecoin issuers to um to cope with that but but overall yeah we we believe it is you know the threat alone of having that issuance cap could obviously stifle stablecoin Innovation it could prevent um some issuers to seek regulation in the first place which is obviously not in in in in in Mika's interest and and apart from that

it is also not technology neutral because we have traditional Financial rates right so we have a lot of credit payments for example already happening in the EU and there is no issuance cap or transaction cap for non-eural payments with those traditional means of payment right so why singling out that um that new technology um so yeah overall we are optimistic that in the so-called level two supervisory guidelines and specifications we can you know somehow make sure the scope is as narrow as possible but yeah overall there's you know a lot of the media articles from crypto media Etc have also somehow misinterpreted the the scope of

that provision just really quick Patrick you keep using this term supervisor it's up to the supervisor supervisor implementation what is the supervisor again the supervisor in in Europe for those large stable coins it will be the EBA the European banking Authority and it will be basically the financial Authority that we'll have to make you know sure that those requirements are basically followed by those companies oh I see so supervisor is some sort of regulatory Authority institution it's exactly EU so like maybe an equivalent like Vincent or something and so exactly in the US it would be the SEC the cftc ETC so there is a Gary Gensler of uh the eeo somewhere over there no it doesn't

it really doesn't work the same Patty I had a question for you do you think that at the last minute edition of that was meant to protect the digital Euro because that's how I thought that's why I thought it was put in there from a long-term perspective I I don't know about that to be honest I I I'm I'm pretty sure the main concern was you know monetary sovereignty but I'm not sure in which way it could be linked to the digital Euro and I I don't know I mean I mean you're right we do see the monetary sovereignty Point really pulled through on Mika so for something like asset reference tokens which uh refer to certain types of other currencies um Fiat currencies

um the central there's a provision that says the central banks can actually pull or cancel those types of asset reference tokens if they think it threatens monetary sovereignty um so the central banks do still have a lot of power under Mika notwithstanding how strong the um regulation may be in terms of allowing different types of assets and giving a path forward well and I think the the fear here is uh you know somewhere around 97. or 99.7 of stable coins and circulation are denominated in US Dollars and and 0.3 percent are denominated in euros and so the fear was uh you know Mika comes along uh you know legalizes

um they're called e-money tokens but basically Fiat back stable coins in in the EU um you know right now that's that's US dollar stable coins right and so if sort of the web 3 economy becomes you know denominated in US dollar back uh stable coins there's really no room or need for a Euro backstable coin and I think that was the fear um that that prompted that last minute change I'm glad they're scared honestly I like I want jurisdictions to compete uh against one another for the best crypto regulation legislation I hope that's the outcome I know I know we said the joke that you use best export is their regulation but honestly like if it

sounds like if this regulation was actually exported to the United States that would just be really really good there's I know there's one area of sub uh subject matter that I want to cover uh that's the issue of self-hosted wallets and really what is the stance of of Mika and how self-custody works and so Seth I'm going to bring you into that conversation because uh obviously this is very very related to Ledger the producer of a bunch of self-hosted wallets so all of that conversation and more is coming as soon as we can talk to some of these fantastic sponsors that make the show possible uniswap is the largest on-chain Marketplace for self-custody digital assets uniswap is of course a decentralized exchange but you know this because you've been listening to bankless but did you know that the

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Mika doesn't actually deal with uh with cell custody it deals with uh with institutional custody and and and casts uh you know how they uh hold uh you know customer uh assets or value uh on their behalf um but it's actually a companion piece of uh legislation called the TFR the transfer of funds regulation uh that that touches on self-custody and the TFR is the the EU implementation of the the fattest travel rule um which uh deals with how uh financial institutions uh transmit uh uh a customer identification information along with uh funds transfers

um and uh so the the transfer funds regulation is part of a larger package of bills in the EU called uh the anti-money laundering package that also includes the anti-money laundering regulation anti-money laundering directive number six uh in the anti-money laundering Authority so there's a four piece package all dealing with really the same topic but the TFR was sort of pulled out of that and attached uh to Mika and um the the transfer funds regulation deals with self-custody um really sort of a long uh spectrum of different scenarios there's really sort of four four scenarios that it envisions um the first is uh sort of a cast to

Casp transfer um so financial institution a financial institution full travel rules of a full travel rule applies um you know a commission from uh institution a must travel along with the funds to institution B that's more or less the status quo um so that's that's fairly normal that wasn't very controversial at the other end of the spectrum is a pure peer-to-peer transaction um and uh the TFR does not apply in that context at all which is also good news uh what would the the interesting part was actually what happened in the middle these sort of two middle scenarios um and I'll explain those but to understand um how we got to those outcomes uh you

really sort of have to understand the politics uh of how we got to those outcomes so uh the two scenarios are a Casp transfer to the casp's own custom customer is one scenario the other is a cast transfer to any other self-hosted Wallet not belonging to its customer or sorry can you hear me yeah we got you okay or a transfer to a non-ucast and so previously some of the left-leaning parties within the EU

Parliament uh the snds Socialists and Democrats the greens had tabled a number of Fairly hostile amendments um including one uh that would just out outright ban self-custody in the EU and they didn't have the votes to do that and so they sort of moved to a compromise position which became known as the the Swiss rule so prior to the EU uh the Swiss had adopted the most uh strict uh implementation of the travel rule uh anywhere in the world and it basically said that a cast can only deal with a self-hosted wallet of its own customer that it has verified that its customer owns and controls that wallet

and so Parliament started uh pushing for uh the Swiss implementation of the travel rule um uh of course there's also the EU Council which is the other co-legislator in the in the EU system and the council is a the representation of of the governments of each of the 27 member states and Germany is very influential in the council and so the council took the position uh of that became known as the German rule which is more of a principles-based risk-based approach it's less prescriptive about you must do this in this situation um and you know more about you know if if a cast uh you know sees a red flag or has reason to know of of suspicious activity it then has an obligation to dig deeper and conduct further diligence

um so you know it's more of a rules-based approach in Parliament and a principles-based approach and a council now there was a third party at play here and that was the French presidency that was uh leading the council at the time and um their incentive was to to strike it deal they wanted to close the file and sort of get credit for for finishing the TFR uh on on their watch and so they ended up doing what's very common in these sort of political uh negotiations uh and sort of splitting the baby so they created these two scenarios where if a Casp uh is is asked to transfer to uh its own customers wallet the Swiss rule applies right it has to it has to verify that that its customer

in fact owns and controls that wallet uh which is a sort of a relatively High uh kyc standard but then in a situation where the cast was being asked to transfer to any other third party or a non-eu cask then the German rule applies and the risk and it's a risk agent risk-based approach which is actually a lower standard so you get this sort of strange scenario where a cast dealing with its own customer that it already has a relationship with has a higher kyc standard than dealing with a random third party or even another financial institution um so uh you know so that's sort of the spectrum of the the transfer funds regulation and how it applies to

self-hosted wallets is it coherent or is it a spaghetti mess because it kind of sounds like it's a spaghetti mess I mean you know I think where it ended up uh you know doesn't make a whole lot of sense um and I think it it sort of reflects that that sort of ugly sausage making of the political process um but it's a it's a heck of a lot better than you know the original uh you know proposed alternative of just outright Banning self-custody in the EU thankfully that didn't happen Okay I can't I just can't imagine like so um it sounds like the outcome wasn't bad you know maybe maybe at the B minus again kind of outcome it could have been a lot

worse sounds like the process was bad I can't imagine um that anyone would think in the EU that this would be an export a regulatory export from the EU if they were planning to ban all self-custody wallets like how would that allow you to catch the next wave of the internet um it seems like from uh what you guys are describing the process is not just about hey we want it we want to capture the next phase of the internet and support Innovation it is sort of the similar effect of what we see in in the US process which is like um we're worried about giving too much

control to this non-state actor crypto thing is is that part of like was there some kind of fear injected into this process like where where is that Spirit where's that ideology coming from that's true that I think uh globally there is a fear about losing government power when you don't have state-backed fiat currency um as a medium of exchange or something that citizens use so that pervades for sure in at least certain countries in Europe um I also think that the gloss especially what Seth was talking about with the TFR and the implementation of this fat if Guidance the concerns about

illicit Finance with crypto are the same everywhere and so TFR is you know when you look at Mika by itself it does it makes sense that it's very comprehensive as Patty said those kinds of things yes it may not be perfect um but when you get to the illicit Finance side of things it does feel very challenging for Regulators across the globe given the decentralized nature the pseudonymous nature of self-hosted wallets and things like that so you do have to separate them a bit when you're thinking about at least the export issue and for sure all governments uh and state actors don't love crypto because it does undermine or could undermine government Authority guys we are sadly running out of time here and there's so much more that we could have talked

about we could have talked about defy and nfts uh I kind of just want to zoom out and talk about this tweet that uh Patrick sure uh put out not too long ago which was I'll read it here U.S crypto is innovate but somehow doesn't manage to regulate uh but EU crypto regulates but somehow doesn't manage to innovate Patrick can you talk about the inspiration for this tweet and what you meant by it and uh what we should learn and glean out of this this tweet here yeah happy too I think I mean as as Seth and Rebecca have said I think it's you know part of the EU regulatory culture to have that ambition to regulate first to regulate comprehensively and to also export that kind of revelatory framework

to all over the world and that is that is not only true for crypto but that has been part of you know the eu's tech regulations in the past and all the also other non non-tech and non-financial regulations that concern whatever crops or you know chemicals or whatever and um the EU has been very successful with that in the past if you look at for example look at what are the Privacy policies of U.S tech companies those are primarily formed by eu's gdpr regulation the same is true for for example hate speech policies and and and and and for many other domains so so the US is literally doing like a copy paste of good EU regulation

not even essentially copy pasting but there's just a lot of global companies that adopt or end up adopting EU regulations because they want to Target the EU Market it's actually a phenomenon that has been coined by one Columbia professor in New York as the Brussels effect that basically the EU is somehow ruling the world through regulation and the tldr is basically the EU internal Market it's the biggest internal Market in the world 450 million people with a relatively High you know purchasing power and so all companies all over the world want to Target both customers in the EU so they're just setting the standard for

the world exactly in order to be able to Target those customers you have to follow new rules and since most companies don't want to set up for example different for production policies but they harmonize how they how they operate many companies all over the world end up adopting EU routes and so yeah regulation has always been you know a big and focus of the EU but on the other hand side if you look at where Innovation happens if you look at for example the the channelysis index of you know the top 20 adoption crypto adoption countries in the world there's oftentimes not not a single EU country in there so we have a problem and Seth mentioned that we have a problem in

Europe with tech Innovation and value creation um there's tons of indicators that you could look at in on in that regard if you look at you know you can see funding if you look at um startup unicorns it's it's not a crypto related matter it's really a tech related matter um so that's you know that's what inspired me to to tweet that because on the other hand side you have a lot of prospering U.S crypto businesses in the US but evidently you have a hard time passing legislation in Congress right but one implication what you just said Patrick is I think you're implying if the US follows some of these other things like gdpr then basically Mika regulation will become

U.S regulation like down the road if if Europe once again is sort of setting the standard for the rest of the world do you think that this will just leak and you know find its way into the U.S I think it's not a you know it it I'm not saying the same will happen with crypto it's not a foreground conclusion but I think you know the longer the U.S Waits with setting its own regulatory framework the higher the chances are that those large American crypto companies that also want to Target EU customers when they set up their own policies their own operations you know for example risk management policies or how they Safeguard their assets or how they inform their

consumers they that they end up adopting those EU routes and they basically end up adopting those globally harmonized rulebooks and it's it's not only me saying that there's actually also voices in the US that are warning of that risk I mean U.S perceived risk that if the U.S continues to struggle to provide that regulatory Clarity that you know regulatory Frameworks like Mika could fill could fill that Gap it's I think it's even if you look at you know the current U.S cfdc commissioner Caroline Pham I think she warned of that in a recent coindesk article um so nobody knows what happens but there is a possibility we've only got a few minutes left here

there's so much more that we have not covered um Rebecca if you could just we'll go one by one if you just give your your closing thoughts about um anything that Patrick just said that came to mind or anything left that uh any stones that we have not uh overturned that people should be uh focused on just because we ran out of time here I do yeah I mean I agree with um Patty and with what you know others have said publicly that their Mika is at least good to look towards um as a way to set out a framework for one token issuances and two um with respect to the types of obligations that needs to be on casps or C5 as we call it you know a little more colloquially um I think the challenge in the U.S so

just to put a gloss on it is like in the EU they don't have this idea of like this is the security this is a commodity and these are the people who have jurisdictions and there's a jurisdictional fight over it which is what I think has held the U.S back a little bit is that we have is that we have these really strong classifications for different types of assets in the US and we've had this jurisdictional fight for many years it's not the same type of thing in Europe so but also it took Europe a number of years right we said it happened in 2017 2018 and it just passed at the end of last year it's a multi-year process and it's still not implemented yet so I am hopeful um because there are a number of policy makers both in the house and the Senate

who are looking to build out strong regulatory regimes um that look similar to this or at least you know have these similar types of ideas that really are based on consumer protection and Market integrity and I'm hopeful we will achieve that and I'm at least grateful that Mika is out there as a path forward in the EU Seth what other stones have we left unturned that you would advise people go down to investigate if they want to learn more yeah well so I think you know sort of responding to the The Innovation versus regulation uh discussion and and Patty's tweet uh you know I think there's a Temptation for you know for for particularly European policy makers to sort of look and see you know oh look

you know these big U.S companies are adopting our our rules and sort of Pat themselves on the back right but there's a there's a cost uh to that and and sort of being the first to regulate and regulating comprehensively comes with a cost and and I think where that shows up is um if you look at some statistics um you know if you look at the 20 largest tech companies in the world uh 12 are American eight or Chinese zero are European and if you zoom out a little bit more uh if you go back to like around the year 2000 um not just Tech but but you know the hundred largest countries in the world I think 41 were European uh today that number is 15. at that rate of decline by 2032 it could be zero right so you know

regulation comes at the cost of innovation and and the value creation um you know that is the reward of innovation right so um you know I I think that aspect uh gets overlooked a lot right regulation means everyone has to do with the thing the same way and if everyone is doing the thing the same way no one's coming up with new and better ways to do it um you know and so I think that's you know as you know American May struggle a little bit to sort of find the right approach but I think um it's actually smart to take uh take its time uh and and to not be so quick to sort of close all those doors and say you know we the

government have determined what is the optimal way for this industry to to grow and operate and and foreclose uh you know future better uh possibilities and you know I think overall you know at the top of the show uh you know you ask sort of what the you know overall grade was for uh for Mika and and you know I think where it ended up is you know is about right where Rebecca put it b-minus um and you know I think that's because it was directionally correct in in the end right it focused on the centralized aspects of the industry casps exchanges centralized stable coin issuers uh token offerings that made sense um but I you know I maybe have you know a bit of a bit of PTSD toward uh you know the actual legislating process

because there were many many attempts and proposals to do much worse things in Mika that we luckily narrowly avoid it um so one example uh was the sort of the and this made a big splash at the time I was almost a year ago but there was a proposal uh to ban proof of work in Mika uh in the European Parliament I heard about this it came four votes short of passing the the European Parliament and not just and I'm not just talking about mining here I'm talking about banning all proof of work based assets right gone right four votes uh and and there were similarly there were attempts very very late in the process like at the very end of the

trialogue negotiations to pull in defy to pull in nfts to pull in algorithmic stable coins luckily we dodged those bullets but the people that wanted to do that still want to do that right before Mika one even finished there are already calls for Mika too and I think that's the the sort of the biggest uh the biggest risk is that you know if if the EU just stopped at Mika I think that would be a pretty good result for the industry provide certainty industry could grow but it's not just Mika um right there there's level two texts um so the sort of regulatory rules for for Mika and the TFR are just getting started and there's this whole constellation around Mika of sort of

related regulations so there's uh Dora the uh digital operational resilience act there's the DLT pilot regime there's the whole AML package um there's um the EU green taxonomy and uh retail rules that are coming and each of those will in turn have its own level two texts right and so we're talking about thousands and thousands of pages in The cumulative weight of all of that and the cost of complying with the cumulative weight of all that is extraordinary which gets back to my original point which is why there that zero large tech companies in Europe um so you know I think you know I don't know I'll stop there that's my that's my right but we certainly see these points

and um yeah there's such an interesting uh trade-off I think right now folks in the in the US are looking at what we have seem like uh Rogue Regulators who are using this approach uh like regulation via enforcement and we're looking at what what's going on in the EU and saying oh can we have some of that like a B minus ain't too bad versus like not even knowing the letter grade but having a professor who's arbitrarily assigning F's whenever he or she feels like it and that's the state that we're in right now uh panelists thank you so much for giving us some time today and for educating us on Mika um we look to forward to having you guys on once again we appreciate it thanks so much thank you thanks thanks risks and

disclaimers of course bankless Nation none of this has been Financial advice it's not even regulatory advice uh regulation is risky you could kill the innovation in your country if you're not too careful all of crypto is risky as well so is D5 you could definitely lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bankless journey thanks a lot