Simon Polrot: Adan – Unraveling MiCA and the New Regulations Threatening Crypto in Europe #362

Transcript

this is epicenter episode 362 with guest simon polo [Music] hi i'm sebastian cuccio and you're listening to epicenter the podcast where we interview crypto founders builders and thought leaders on this show we dive deep to learn how things work at a technical level and we fly high to understand visionary concepts and long-term trends if you like epicenter the best way to support us is to leave a review on apple podcasts and if you're on a mac or ios device it's super easy just go to epicenter dot rocks slash apple and that'll take you

exactly where you need to go to leave us a review today my guest is simon porro and he is the president of adan or the association for the development of digital assets it is based here in paris and has a mission to promote the development of the crypto industry in france and more broadly in europe and as i mentioned here before i'm a staff member of this organization as its communication director simon's one of the pillars of the crypto space in france we met way back in the day when just a few people were talking about crypto here we would often uh meet at meetups and speak together on panels and around that time he co-founded asseth which was renamed to ethiopia in france last year

and of course host the ecc conference in paris so around the summer of last year he told me about this idea to create an industry body which would represent the french crypto industry i was immediately on board and we started working on the project we recruited the early members and we established the the foundations for what would become adan and it all came together in january of this year and we now have close to 50 member companies and we're a permanent staff of three people plus one intern i wanted to get simon on the podcast to talk about the digital finance package it's a regulatory proposal that was drafted by the eu commission and released to the public last month and since we got our hands on this document we've been working hard to understand it

dissect it and establish our positions with regards to this regulation so the scope of this regulation is really broad and it covers nearly every type of activity which is related to cryptocurrencies utility tokens stable coins and security tokens in europe in addition to being broad it puts enormous restrictions on the define ecosystem it's not so much that it restricts defy actors to do certain things or act in certain ways but it simply ignores most of d5 applications and use cases and thus it makes it nearly impossible for d5 to continue to exist in its current form in the way that this regulation is currently drafted it's difficult to see how defy stable coins like dye could continue to be considered legal

and most of the innovative token issuance models that we've seen emerge recently simply couldn't interact with regulated exchanges since this regulation came out our goal has been to put together a task force of companies and other european industry associations and then from here with the right partners we want to lobby at the eu level which is of course a long and costly process what's at stake here is the eu's competitiveness on the world stage of course regulations should protect consumers and weed out bad actors but at the same time it should leave room for innovation and proportionality when it comes to crypto startups so we went a little long on this one but i think it was worth it because it's important

to understand what might be coming to europe but it's also a call to action to join us in our effort to preserve innovation and define and one of the ways you can do that is by becoming a member of adan so be sure to stick around until the end where we talk about that and other ways that you can support us and stay informed the bit of housekeeping we're hosting another virtual meetup on october 29th it's at 1800 utc so that's 11 a.m pacific 2 p.m eastern and 8 p.m in western europe we did the last one in the spring and it was lots of fun there was about 30 people there we could just kind of chat and hang out together in a zoom call so please come

and join us if you want to register it's at epicenter.rockslashmeetup algorand is putting together a free webinar to show developers just what you can do with the platform it's a one hour tutorial and it'll cover use cases like crowdfunding asset tokenization supply chain management and gaming applications i'll tell you a little bit more about that later on during the interview but for now here's my conversation with simon pologo i'm here with simon porro who is the president of adan simon thanks for joining me thank you very much sebastian so we were just saying before this it's going to be a little strange because we know each other so well and also you know we're used to

speaking in french and so this is going to be a bit of a challenge for for me and you to not like slip back into french and also these questions are a little weird sometimes i think because you know i'm trying to put myself in the position of you know a listener who doesn't necessarily know this topic and since i've been you know so so since we've both been working uh very closely on these topics it's gonna you know i'll have to make an effort to sound like an outsider to ask questions as if i was an outsider uh yeah let's see let's do our best yeah so uh let's tell our listeners a bit about your background and how you became involved in crypto yes of course so i have a legal background uh i was a lawyer before uh jumping in

the crypto space and a tax lawyer more precisely so i did the tax declaration tax consultancy etc etc and but i've always been very passionate about technology and i had stumbled upon bitcoin quite a few times on news websites in i don't know 2011 2013 i mined a few bitcoins in 2013 and then i just abandoned the the topic and i jumped again one last time i would say in 2015 when i heard about ethereum well first i was just i just i

just wanted to to buy a few bitcoins just to invest a bit of money but then i heard about ethereum and about the smart contracts about everything surrounding uh automatic execution of transactions on blockchain and i was really hooked i think it was my legal background that just it clicked with me when i when i heard about the fact that you could do complex transaction transactions on on a blockchain that could be fully automated and and then you can edit the transaction afterwards where it was really like uh i was like okay this will be huge this will be very significant for uh for for the finance for the value in general and so that's where

i decided to uh yeah to be a bit more than a hobbyist and to create projects around the the crypto assets industry in general uh first in addition to my work as a lawyer and then and then very quickly it became my full-time job yeah in the beginning i remember when i mean in the early days of ethereum in 2015 and 16 i seem to recall that there were a lot of people who were you know like with a legal background that were looking at ethereum and interested in ethereum because of this notion of like automatic contract execution and like back then we had a couple of people on the show that were you know looking

at ethereum from that perspective you worked at a law firm uh and i'll let you talk a little bit about about that part of your career and how it relates to crypto but were you finding around you that other lawyers or other people with a legal background you know somewhat drawn to uh ethereum for for that reason yeah yeah definitely it was very uh naive i would say uh attraction because it was based on the yeah the the best case scenario of what uh of what a smart contract would one day become but but still you know it was the potential of the technology to to to be able to execute transactions automatically that was quite a bit a bit uh magic as a lawyer i was like uh

okay there's so many legal implications to this i need to to research it and at this time i was one of the first lawyers that was really as technical on the subject so i had quite a good understanding on the on the main concept even if i i'm not i'm not a developer or something like that or an engineer but i i was really interested also by the technical side so i think that was what made me stick with it even though of course the prom the promises weren't there so a lot of lawyers just abandoned the subjects but i still think today that it's uh it's still possible that the the potential that we saw in 2016 will will realize some time and i think it's it's beginning to to

materialize uh right now so but it's true that when i when i first presented the the crypto currency and the blockchain because the blockchain was the magic word at this time to my associates to the to the partners of the firm i was not a partner unfortunately but i presented to the partners and they were excited by the id and i think most of the lawyers that that touched the subject at this time were excited by the id but then after that of course there's all the realization that it's it's very very early and there's no nothing much to do if you are not really involved in projects as a lawyer in the in the space algorithm is running a free webinar to

teach developers how they can use the platform to build sophisticated applications for use cases like crowdfunding asset tokenization supply chain management and even gaming applications you'll learn how to get started with the command line tools and use the sdk and rest apis you'll also learn about the algorithm foundation's grant program and additional funding opportunities that the algorand ecosystem has to offer so if you're building on a blockchain protocol that has unfeasibly high transaction fees and doesn't provide the speed you need or if you work for a large enterprise or financial institution and are interested in learning how to build applications that could integrate in your current technology stack or if you have no blockchain experience at all and just are looking to

take that first step into something new well this webinar could be for you visit alagran.com epicenter to sign up once again it's free and it's happening on november 17th but if you're listening to this after that date no worries you can still go to that page and watch the replay we'd like to thank al goran for the support of the podcast and so what was your role then i mean i i i know that you worked quite a bit in the early days of your career uh at this law firm and looking into the legal and regulatory implications of crypto but particularly particularly from the funding uh perspective uh this was around the ico boom can you talk a little bit about that

yes of course so first i was really attracted by the by you know ethereum in general uh basically so i was uh quite passionate i built a website called ethereum france basically talking about ethereum in french i wrote a lot of articles about all all the aspects around ethereum ranging from how to buy ether to what is the app etc etc so it was really the objective was to basically educate everyone on what is ethereum and the potential of it and then i of course i the more technical i became and the more involved in the project i became the the more i saw the potential of some

projects so i was very interested in following those those projects and helping them also of course in the legal side even if it was very uh preliminary at this time and i think the the tipping point was uh defcon too uh when i went in shanghai and met all those projects and all those people and passionate people who are building things with those really primitive tools right at this time it was very difficult to build a project in ethereum ontario that that's where i think i i saw the passion and i saw the community and i was like okay i need to uh be even more focused and from there you know you're right a few a few months later the the ico craze uh started i had the

chance and the opportunity to to be an advisor for a few projects that i met at defconto uh namely i exec for example and it was really really interesting to see all those ideas uh becoming actual projects and a very good projects right i exactly still a very big component in the space so yeah that was really what how how the the id progressed and how i was more and more involved and then uh at one point i was like okay i need to be even more involved and and then i quit my lawyer's job and i joined uh variable the consensus project and it was at this time trying to build

derivative products on ethereum so it was really d5 before d5 unfortunately this project did not came through but it was really a fantastic experience for one year and a half i joined an exchange platform also a french exchange platform called lgo and i worked a bit for them to develop their activities in in france and then adam that's where uh i had the idea of creating this association so you see i've i come from a legal background but in those two startups i was not the legal guy not only the legal guy i was really on operation so i had the opportunity to

see all the issues that you have when you try to create a project in uh in the the crypto space uh in france specifically because i was based in france and and from there i i saw that there were very significant issues that needed probably to be solved at a more global level and that's where the idea of the association was born yeah i remember when you first told me about this i think it was in the summer of 2019 and you know around this time there were other associations in france uh there there were a few and but you know the way i would characterize them is that they were uh

enthusiast associations and although they they did a great job at educating people about crypto and trying to get people involved in the crypto space there was not so much of a mandate to grow the industry and uh bring together industry players as a as a as a sort of force right um and so this idea of of adan came to you particularly to uh to create an industry body so can you tell us a little bit about what is the role of adan in the french ecosystem but also moving forward like what is the role of adan at a more supernatural level at the eu

level yes of course so basically that's that's it it's an industry body uh the the idea was really to make the crypto assets industry existing as an industry like because before that it was a few companies walking towards some goals that some were similar somewhat dissimilar of course and then the competitors but there was no body to represent the industry as a whole and to talk with public authorities with private sector with representatives with other associations as the representation of the crypto assets industry and i think it was really detrimental to the development of the

industry because there were no clear voices they were no clear representative and it was very difficult for everyone except the digital asset sector to understand what what it was about and what what were the issues we faced and and what we could bring basically to the economy because it's a very specific sector of activity that's still uh not very well understood still today yeah if you don't have someone to discuss with to discuss with and to basically ask your questions to it's very difficult to to know more and even to know that this sector exists right so that was really the first objective and then from there of course there's so many things to solve so many

problems that the industry is facing right now just to develop its activity we we are working on you know accessing bank accounts for uh crypto asset sector for examples and and how those actors should implement kycml procedures uh how those actors can finance themselves etc etc and how the french public the the french state but also the french private sector can help the industry grow et cetera et cetera by the way we should mention that adan stands for association foreign which means the association for the development of crypto assets or digital assets we chose to go with the name digital

assets because we felt that that was kind of representative of uh you know the entire industry and um but the french crypto sector you know has developed since 2015 i think or something like that with the first exchange and of course ledger uh being one of the major players here in france and sort of well known for uh for what it's for what it's built over the years let's you know talk about a little bit about uh this this political um desire to for france to be crypto country right like this uh you know crypto first that we saw from the government in uh in 2018 i think can you can you talk a

little bit about that context of course of course first i would like to precise that uh i think the first exchange was in 2011 it was premium uh well the ancestor of right at this time yeah uh btc what was it again bitcoin bitcoins yes exactly yeah um so it's even older than that um and i think it was the the earliest exchange in the world right so that that's significant but yeah you're right that um the industry was seen in i don't know in 2018 2017 2018 by the government basically what happened is that uh the regulator

in france and the authority financier they opened this fintech this whole fintech department that is listening to fintech projects and helping them becoming regulated and because there was so so much openness on this uh on this fintech department the blockchain project the crypto assets project in france they just went to the regulator and they they presented their their projects whether it was an ico whether it was we went to see them with a variable etc etc so any kind of project want to see the regulator and they were uh really impressed right they were like okay what's going on

what's this uh whole crypto asset sector that that's developing in in france uh is there something significant to do there and they built a knowledge as the regulator uh level that they passed through to the ministry right and the ministry they they saw this subject and they were like okay this is very interesting uh maybe there's something to do so the financial market authority you know met all these crypto projects and then they went up to the to the economy minister and was like okay here there's something here exactly uh and from there there's there were like studies and and of course they try to better understand the sector how it worked and everything and everything

and then there were the ico boom that just made everything go faster basically because they were they felt like okay we need to to do something we need to regulate we need to there's so many things happening there and maybe if we are quick to give a clear regulation to the sector uh that will help actor grow because they will know what they have to do what they can do what they can't do etc etc so that that's where the id grew from okay what's this thing to we need to uh bring well to help the crypto asset sector grow in in france and this came into fruition in 2018 with a low that

called pact law that created the whole regulation for the crypto asset sector and there were very positive political messages also sent at this time saying yeah we want a crypto nation we want to build a dedicated sector of activity etc etc so that happened all this happened in 2018 but then of course there's time to apply the regulation and the regulation came into force in france uh effectively uh in march this year so uh now we have very clear legal framework in france for crypto assets actors uh basically market market actors and also for icos but yeah on this

it's a bit late right yeah exactly okay that's that's enough about france let's uh because our listeners might get bored with with uh all this stuff that's very specific to france but let's broaden a little bit and talk about europe and where where there's a lot at stake here and this is going to be the bulk of our conversation uh we're talking of course of the digital finance package which uh was uh drafted and released in late september so you know just for for context what are the high-level principles of cryptocurrency regulation in europe what are the major frameworks that cryptocurrencies and cryptocurrency actors fall under uh in the eu

okay there's a few big ways of regulating cryptos in europe basically uh we can we can associate yeah domain way of regulating the first one is considering that that crypto assets are uh securities all of them and make them fall into the financial regulation in general so that's the approach taken notably by germany and a few other countries so if you are operating for example a crypto crypto assets exchange in in germany then you have to be a regulated uh financial exchange that that's that's as simple as that so that's the first

the first way of doing it which is uh quite easy to do of course but can lead to some inefficiencies and adaptation because the financial regulation is is very strong and and very difficult to apply for uh small actors like the crypto asset sector and then you have the countries that tried to create a dedicated framework for crypto assets i already mentioned france of course did this but you have gibraltar you have malta you have estonia they all have like a crypto license where basically you uh you describe your project and you you have specific obligation uh that are adapted to the crypto assets and uh that may mention for example custody

or this kind of issues that are very specific to the crypto asset sector so these are bespoke regimes that are created by national governments in order to help players and sort of startups in the crypto space get started without all of the encumbrances and red tape and everything of you know a very uh complex regulatory framework as exists in the financial space that's a like exactly this and then on top of this there's uh irrespective of the of the local regulation there's an obligation for each member state to put into place regulations on kycaml for all the all the exchanges that deal with euro

and all the custodians that's from eu regulations so it needs to be applied everywhere in the eu it's the the amol 5 directive cryptocurrency startups in europe are regulated at an eu level by aml 5 which implies that every exchange or custodian conducts aml kyc on their customers but other than that other than this specific know your customer regulation there hasn't been until now a framework at the eu level to regulate things like you know specifically you know how tokens are listed by exchanges

or uh things like stable coins or things like icos until now these have mostly been regulated at a local level exactly okay so let's let's now jump into this this digital finance package what is this digital finance package uh that was released by the commission and how how does it change fundamentally this this situation that we're currently in yeah so the digital finance package it's a big package very very very big as its name suggests it covers everything digital and finance and the objective of the digital finance package is basically to make the eu competitive in an area where the finance finance is

increasingly digitized so it's very broad and it covers there's a lot of different regulations that covers a lot of different areas but of course what interests us is a few pieces of this regulation that will concern specifically the crypto assets industry namely the mica regime markets in crypto assets and then the pilot regime for the security tokens those are the two components that are specifically targeted to crypto assets in general so basically assets registered on a blockchain and the idea behind this uh this regulation is to consider the crypto assets as a

very specific new asset class so it's quite similar to the approach that was taken by friends for example that really considering the crypto asset as a as a different industry as the other ones and to create a specific set of rules uh a bespoke regime that will apply to those actors and to the assets they are touching so that that's what will happen um that that's what the the regime uh sets uh sets in motion every single crypto assets actor uh in europe will be regulated by mika and every single issue of security token

can use the pilot regime which is a very specific uh uh kind of sandbox for security token okay so when you say every single crypto currency actor in europe will be regulated under mika um i think we're going to spend most of this time talking about mika because it's the one that concerns defy more so than the the pilot regime but we'll we'll talk a little bit about that but when you say every single actor who are you talking about here give us some examples of like who are the people who or the companies that are getting affected and regulated by this broadly speaking mika is creating a new category of actors they called a crypto asset service

provider so if you are providing a service with crypto assets you fall into this category and it's very inspired from the financial regulation right so basically the crypto asset service providers are the custodians uh trading platforms exchange execution of order reception and transmission of orders of crypto assets so if you look at the different financial services in mifid which is the financial regulation in europe just a copy paste basically adapted of course because that's the custody but for the final for the for the crypto asset sector so if you are uh providing a service we are an intermediary

basically you're an exchange you help people buy or sell to assets you advise them on crypto assets you will be regulated under this uh this regulation so you are a casp and then there's a regular a part of the regulation that is focused on the issuance of crypto assets so any issuer of crypto assets will also be regulated whatever the the mean of of issuing the crypto asset and there's specific um dispositions on stable coins and this is a very very sensitive topic with a lot of pages of regulation just to give you an idea the whole

regulation is like a 176 pages so to just on mickey regime and the stable coin part is like a third of that so it's very very uh significant and there's obviously a focus on of the commission on stablecoin so there's scripture crypto asset service providers and token issuage so in crypto asset service providers uh tell me if i'm right here but we have exchanges we have anyone who's a custodian and we have any company that is providing services to holders or users of crypto assets and then in the issuer category we have

any entity that is by some means or another issuing or creating any form of crypto currency or crypto asset yeah yeah that's exactly this okay so let's talk about what are some of the impacts uh and i think the most interesting thing here is the issuance i think the the crypto asset service provider aspect concerns companies that were are somewhat regulated and probably would have been regulated anyway like we were to expect that so like exchanges companies that are usually perhaps at the periphery between crypto

and in the traditional finance market i mean of course there's also actors in there that would not have been like at this periphery so but talking about the issuance this is where i think it's particularly interesting because it's it's hard sometimes to pinpoint who is the issuer of a token and there's a lot of kind of gray area there that even we haven't really been able to to sort out like how these these participants would be would be regulated so can you talk a little bit about go into detail about that issuer portion who it concerns and what are the challenges here one of the thing to have in mind when you are dealing with this draft regulation is that basically the commission tried to uh

cover everything it's it's there's very broad definitions and an issue of crypto assets is basically any kind of legal entity that creates a crypto asset whatever it means and we first thing is that you will fall into the regulation as soon as you issue something and use and you and you sell it you exchange it against fiat or other crypto assets and it's only if you're a legal entity that you fall into the regulation so that that's interesting because the first thing is that any kind of ico basically ico and can of any form right of any of any uh of any

significance will fall into the into the regulation so if you are uh issuing a token to finance your project you will be regulated but then if you are not a legal entity you are basically excluded from the regulation and it won't apply to you and that has some consequences which we'll get into in a little bit exactly let's talk concretely about sort of projects that we know in the industry or the like in in the d5 space like can you can you give some concrete example as to you know how some of the projects uh let's let's take i don't know like urine finance for example or a a dex uh or an you know an automated

market maker like uh uniswap let's maybe kind of look at these different examples and how they would be regulated under mika those are very uh interesting examples so for example uni swap they have issued a token they have sold a portion of it to it to its investors attributed to its investors a portion of it they have distributed with an airdrop a few of it to users of the uniform platform and there's a few of the tokens that are attributed to the developers and the team and the advisors etc etc so it's quite similar to a traditional ico except that the tokens are for free

basically [Music] and that what's interesting in the regulation is that there's an exemption to some of the obligations of the regulation if the tokens are offered for free but it's only applicable if it's really for free right if it's if it's given if it's not given in exchange of a service or or if it's not given in exchange for something that you've done for them before or something like that so probably a part of the tokens would fall into uh the regulation because they would not be considered offered for free and then you will have the full regulation applied and then some of them may be considered as offered for free and then you will have some exemptions but in any case

you will need to be a legal entity and to register yourself and if you have the full regulation applying to you you need to draft a white paper you need to so that will describe all the issuance and how there's a few sections every section is detailed so it's very detailed regulation you have to notify this white paper to the authorities you have to publish it and you have to comply with a few obligations that ensure integrity honesty of the issuer you have to provide with a 40 days delay where the where the consumer can retract is is buy of the token etc etc so basically what we can say is that this

regulation covers a lot of different assets and it's really tailored for traditional icos you know the ones that we've seen in 2017 and 2018 with a white paper with a set of you know you you describe the project you say i will sell x tokens for x prize there's a pre a pre-sale sale a post sale i don't know um and basically what we've seen in 2017 and 2018 and the obligations described in the white paper sections really reflects this uh this analysis so what i can say is that this regulation is trying to regulate

something that really does not exist anymore today uh that's uh really really that's there's not a lot of traditional icos today and all those the the token issues that we see are very innovative so so just just stop there for a second because when you say a traditional ico you're talking about an ico or one creates a project and is trying to finance that project by selling tokens to the community exactly okay and that's what we've seen recently that's that's not what we've seen recently right we've seen uh very different approaches we've seen a fair launches with uh with a with a year in finance we've seen um air drops with uniswap we've seen

so many different ways or nfts that give rights to a token or a token that is a drop to someone who has who has used a protocol or another one and those are edge cases that are basically falling in the regulation because you still are given a token and you you kind of enter into the into the the different uh criteria but then it would not really make sense to create a white paper so it's it's really it's already something that's a bit an age case but really what uh what you have to have in mind is that this regulation was tailored for old school icos

and it's not really suitable for me for the new ones for the new token issuance when on the face of this okay you have to be a legal entity you have to create a white paper if i play devil advocate here i mean that all sounds fine and good right it sounds fine and good to like have a company that's issuing a token and that has you know laid out its project in and thought about all the different aspects of the project and okay maybe it's a bit of a hassle to submit that to the regulator and but what what is really what is really the the problem here and how will it negatively affect the industry do you think well that's that's really the fact that it's as you say

it is uh it's good to have a regulation that basically covers the token issuances that are targeting uh you know the general public and that will uh sell a product in exchange of money and that will create you know it's it's basically um a funding of a project's high risk project by the general public and that's that of course needs to be regulated and and that that's that's of course very important but then the regulation is very very broad and covers all the kind of token issuances including uh those who are very innovative and that do not

target the general public and those token issuances may have some problems in europe so that that's basically that's basically it okay so you're saying that a a project with an innovative token model may not be able to particularly like particularly articulate very well the project in a white paper like what what is the what's at the crux of the the issue here basically they won't be able to to respect the sections of the white paper they have to to to respect right uh because in white paper you have sections and uh you have to declare the white paper before the operation you you have to declare per year deficiency you have to declare uh the fixed price of the assets of the

assets for a certain period of time you have to explain all the risks you are taking you have to explain so if you if you if you compare this to how for example year in finance was launched of course you won't be able to describe all those conditions in a traditional white paper so that's something that would be very difficult to basically that would just render those operations out uh illegal in in in terms of uh offered eu law which means that the issuer uh would be considered as uh as breaching the eulo and the tokens won't be able to be listed in eu

regulated exchanges so that that's maybe the most important consequences that it could have we'll we'll get to that part in in a little in a little bit so essentially if we recap here on on this uh on this white paper requirement what it does is it it creates a framework a very rigid framework that is mostly targeted at what we described earlier as traditional icos an innovative new type of token issuance model simply won't fit in that framework they won't be able to comply with the different sections of that framework simply because they can't simply because there is no such thing

as maybe a sale price for that token or there there simply isn't room for that framework for those projects and so therefore all the other consequences like for example not being able to be listed which we'll talk about in a second would not be fulfilled yeah and i think it's a it's a very broad uh remark that we can say on the regulation and maybe we should have started with that is that the regulation was really thought and built for centralized actors and traditional actors that are equivalent to financial actors so the reasoning of the commission is that there's this new

asset class called crypto assets there's this new type of actors that are helping others buying and selling them and issuing them and who are even issuing them themselves and we should just regulate them so they have this um this approach of the the crypto asset sector that is basically a pseudo similar to the financial sector and that you just need to basically replicate the rules of the financial sector to the crypto asset sector and then everything will be fine you just adapt them you just made them more progressive and and that's it and that's really how the regulation was thought about i think

and in passing most of d5 you know falls falls to the side that that's the the main issue because of course there's those actors in the crypto asset sector that are similar to the financial sector actors they exist and of course uh kraken and and then and then coin house and then and then bit stamp etc etc there are they can be considered as as similar to financial sector actors right but yeah that's the whole point of the blockchain of being decentralized and to to have those use cases that are more on the control of the the user or the control of the the person who are

using the protocols permissionless innovation that's what you're referring to yeah yeah exactly permissionless you can create tokens just by interacting with a smart contract that was deployed by an anonymous person you can integrate all the use cases together to create new products you can access to all those use cases without any kind of uh permission and any kind of a of a legal entity and those use cases that developing quite uh rapidly those days are completely out it's not it's not it's not that they are out of the scope but they are out of the

of the reasoning of the they were out of the reasoning of the commission when when they built the regulation and the issue is that they were out of the reasoning but they are not out of the scope because the scope is so broad and that it covers all all the all the use cases when you are talking about issuance so by having a broad scope many you defy applications and use cases are covered by the regulation but they are not taken into account uh in a way that makes them feasible in europe yeah that that's what that's what i think anyway so maybe there's other uh as a point of views but yeah let's talk about stable coins before we get

back to crypto assets service providers or casps so what what are the risks to stable coins i've talked about this on the podcast a little bit but i really want to get into the bulk of how d5 stable coins like die are threatened by mika the stablecoins issue is a very uh political one right uh in in general all the and international institutions are looking at stable coins uh either to issue some if you are uh talking about central banks all to regulate or to limit them etc extra so yeah the financial stability board that has

issued a paper on stable coins that raise some risks there's a paper unstable coins from the the central bank of europe uh actually tracks the russo the g7 uh so that all those uh interest in the stable coins was raised by of course the libra project that was announced a few years ago and the approach now of the stable coins by all those institutions is very defensive so basically the stable coins are seen as a potential threat to the financial stability of the financial sector as a whole which is quite a big threat right so the approach of the commission is to regulate every single asset that

tries to replicate the price of another assets and to regulate it very very strongly asset reference tokens yeah so this is a new kind of token a new definition completely new because you know you had those definitions that were passing around on different uh institutions of utk tokens payment tokens uh etc etc and the the eu decided to create a new way of considering the tokens the the stable coins and basically the definitions is focused on the reference rise so as soon as you issue a token that has a reference price

so the target price basically you are targeting this price that is another asset then you fall into the regulation and that could be a crypto asset or any other asset yeah the collateral the way you you maintain this value the way you try to reach this value is uh irrelevant on this definition so for example you have usdc or usdt that are tokens that are backed or supposedly backed by real real assets so one usdt usdc is supposed to be backed by one dollar in value and then you have the guy who is issued by a smart contract

and who is backed by crypto assets namely ether or wwbc etc and there's a system in the smart contract that ensures that the value of the control is always more than 150 percent than the value of the die issued but those two would be considered as as such reference token or more specifically e-money tokens because they are targeting the dollar which is a fiat currency and they would fall fully into the eu regulation uh with a lot of obligations that are completely by the way but we'll see

on this together completely impossible to respect by uh the die let's talk about some of these obligations and why are they uh impossible to respect specifically in the case of dye i think which is the one that is stable coins like die are particularly uh hindered to say the least in this regulation yeah so as i said the the approach is defensive so the asset reference to tokens or e-money tokens are banned if from being traded in the eu or issued in the eu if they don't respect all the regulation and again the regulation was built with

in mind centralized entities that have uh you know a legal entity that that have assets that have uh um like personal that that basically can fulfill some obligations by respecting uh some very specific criterias and for example you for to issue uh electronic money tokens you you need to be authorized as a credit institution or eman institution so you need to respect the financial uh the financial regulation you need to provide all the holders with a claim on your assets you need to allow for the redemption of the token at

any moment upon request of the holders you need to invest the funds in secure low-risk assets that are denominated in the same currency as the one referenced by the token you are issuing so those obligations are the obligations of electronic money token that would be backed by the same currency as it is issued in so so you said something there that i want to just kind of stop on for a second and because it's it's so interesting so with dye for example the issuers of dye whatever entity that is or whatever entity the regulation would decide that is would need to provide a to their uh to die holders the promise

that they can redeem not ether but that they can redeem usd for the equivalent amount of their tokens that that's essentially what the regulation says yeah yeah that's exactly what the revocation says so basically the regulation is extremely broad so die would fall into it but the the obligations that they put on the issuers of the tokens as such that it doesn't make any sense for the die because of course the guy doesn't have dollars backing any die that's the whole point right so if you if you force the die to respect those

obligations you're basically banning them from the eu as a whole because they won't be able to respect the regulation or that wouldn't be die anymore okay so once again we're in a situation here where the regulatory framework is very broad it applies to you know it applies to different types of cryptocurrencies including stable coins but it doesn't make certain types of activities feasible exactly and another another funny thing is that uh that's not very funny but you cannot serve any kind of interests on stable coins in general in the eu that's part of the

regulation and this means that basically any kind of defy products that would include the serving of interests of on any kind of stable coins would be considered as illegal in in the eu so you see there's a few very significant issues in the regulation the general framework and the general idea of being protective and to protect the consumers are really they really make sense right because of course it's very important if you issue a token that and you say it was one dollar i have one dollar in my bank account that there's some kind of regulation that that ensures that

of course the the guy has one dollar in the bank because he said he had and uh and and and there's some kind of authority that should be able to to check this and this is very important because it's not really the case right now that all the the the stablecoin issuers are are regulated so so uh so clearly and it's not so clear that there's always this uh this funds backing all the tokens issued and we see where the the fear come from right because the regulation of course is a it's a risk-based approach so you see a risk you see a risk that the token is not properly backed so you issue a regulation that makes sure that everything is properly backed that that makes sense

what is the problem here is that this again we are in blocked on the blockchain space there's so many innovative use cases that are decentralized that use new ways of creating value and etc and those are completely not considered by the regulation but still in the scope which is this is really the problem right if they were not in the scope right okay you can have all the all your decentralized use cases uh happening outside of the regulation and that would really make sense that's how it happens today for example in france where the fine the current regulation does not include decentralized use cases but

that's not what the commission did that the commission did define define the the different use case in such a manner that the decentralized use cases fall into the scope but they cannot respect any obligation of course because they are they are decentralized or semi-decentralized yeah i think that is what's so frustrating about this is it this regulation it's called the digital finance package one of the one of the things that they claim is that this regulation aims to promote uh innovation in europe and uh to make the eu more competitive but in fact it just it squashes an

entire industry or at the least makes innovation in that industry crawl to a stop and that's what's just so incredibly frustrating so let's talk about the part that is puts the nail in the coffin here and that is how the obligations on issuers is taken into account with regards to crypto asset service providers and how it's really the crypto asset service provider rules that block access to the markets for any of these assets that don't comply yeah so it's a very simple rule that's

defined on article 68 of the regulation that basically says that if you are trading the new and you have to decide which assets you want to list one of the rule you need to apply is that the assets must have respected the white paper obligation and must basically have respected the issuers obligation of the crypto assets of the mika regulation so if the asset did not respect this regulation you are supposed to ban it from your trading venue as a matter of principle because it's not compliant with eu law in general so basically the consumers in the eu zone should not be able to trade it

which means that the centralized entities won't be able to list assets like the dye of course because completely banned of the eu in general and all the other assets that would be issued without respecting the issuance obligations so we need to of course we need to remove this article 78 and we are trying to do this 68 sorry so any any crypto asset that doesn't comply with mika so which has not complied with the white paper uh requirements that we talked about earlier or for example stable coins that don't comply with mika because they simply can't should not and

cannot be listed on any regulated exchange in europe yeah that's it exactly okay and it's even harsher for the for the stable coins because the stable coins again everybody's afraid of them and the stable coins there's uh penalties for just issuing them and uh there's uh they're really really banned from the eu if they do not respect the regulation right okay so let's let's take two examples here let's take the example of a regulated exchange like bitstamp and eu exchange but any other exchange that operates in europe like kraken or coinbase or or any of these other ones uh versus a a dex how would this regulation affect

these two types of exchanges differently well the first type of exchange would need to be regulated under mika and become a casp so crypto asset service provider as soon as they target the eu um market in any way so if they do marketing uh if they uh they are yeah basically selling the products to the eu consumers they have to be regulated in europe that's the if they have eu customers yeah that's the scope of the regulation well it's not only having eu customers it's really targeting them because if the consumers go and see you

without you targeting them specifically then you are fine but if you do any kind of marketing in the eu then you are in the scope and of course if you are located in the eu you are in the scope so those entities that would fall in the scope need to need to register need to uh there's a whole approval process you need to file a documentation that explains how you or you respect all the obligations of the casps in terms of uh organization of your activity of the guarantees you provide to your customer the currency and the price on the market practice etc there's market market abuses rules etc etc and you would need also of course to

respect article 68 where you define the products you can list on your crypto assets on your code as a service provider and you need in the rules to exclude all the tokens that are not in the scope of the regulation so you would not be able to list all the default tokens all the stable coins that are not regulated in europe etc etc if you are decentralized exchange but a truly decentralized exchange like uni swab for example of course you you don't have any kind of legal representation and you have a marketing service and you

so you won't fall into the scope of the casp and of course you won't be affected so those uh decentralized exchange would probably continue to exist that's the question of how the legal entities that would basically create and deploy those those services could be affected in a way if those assets are used to trade assets that are not permitted in the eu but it's not really clear in the regulation if there's a way to to affect them so probably the d5 products would be functioning normally but then the

centralized entity which are the gateway right to the e to the to the crypto assets world uh where you can exchange your euros against uh crypto assets they would need to be fully compliant with the with the casp first okay so so uh sort of centralized exchanges or exchanges that we typically see as centralized exchanges we'll need to register we'll need to fulfill several requirements but at the same time we'll need to forego listing any token that is does not comply with the regulation a decentralized exchange could potentially keep listing those tokens of course it's hard to enforce any of that on a decentralized exchange so if you have a

dex for example that has a governance model which decides on which tokens get listed it becomes nearly i think impossible to to really enforce any of that but there is still a question of what would happen to the legal entities which may or may not exist but if those legal entities do exist uh what would happen to those and even if there's no legal entity i think we've seen in the past that even individuals or groups of individuals like open source developers or whatever you could be targeted uh in terms of an enforcement action don't you think yeah yeah exactly and this is more the you know the

certain uncertainty here that is uh damaging because uh it will be very complicated you know it's already very complicated to convince the euvc to invest in crypto assets industry uh compared to for example a us-based vc but if you don't have any certainty on the legality that of your activity and on the fact that maybe you may you could be considered liable for the exchange you are deploying on the mainnet for example of course this will be detrimental to the development of the industry in europe yeah how does this affect mining and staking does the regulation touch any of that yeah there's a specific exemption

from respecting the white paper obligation if you are issuing your token by ways of mining but really mining there's no mention of staking or and then there's no definition of mining actually so we don't exactly know how the commission uh sees mining yeah i mean what's what's telling about this paper is an entire paper there's not a there's it mentions mining once and it mentions that exemption but it doesn't defy knit or anything like that to exclude from the obligation yeah and also it's really it's not really clear how it really affects the operation because most of the assets that are mined

are not issued by a legal entity right so they are already out in the scope of the regulation completely which again raises the question of those as could those assets be listed in the eu and so for bitcoin for example bitcoin is mined but it is not a legal entity in the white the the regulation requires that assets are issued by a legal entity so there's the question of whether bitcoin or even ether could be listed in the eu yeah so they they they will be able to be listed presently because they are transitional dispositions which mean that if you did not respect the the regulation before it came into force well

of course you cannot be sanctioned because you didn't know of the offer regulation that did not exist at this time right but this means that if a new bitcoin was issued like a month after the regulation came into force then it would probably not be able to to respect the obligation and then and then could not be listed on exchange and what's really interesting about this paper too is that it never mentions bitcoin it never mentions it it never it never even says the name of of the currencies that it might be regulating it just seems like uh there's just an oversight of of the entire d5 space like let's regulate crypto but let's just pretend that defy doesn't

exist is this isn't that the kind of message that uh that comes through when reading this paper yes it's it's true that it's very telling that there's no single mention of any even the word cryptocurrency is not there there's no bitcoin there's no ether of course there's no cryptocurrency you mentioned there's the terms crypto assets the terms utc tokens asset reference tokens e-money tokens and security tokens so that's that's the vocabulary of the commission and it's very telling that they basically try to avoid the whole problem of characterization of the crypto assets by

putting together everything except the security token and the stable coins but everything else is like a huge not very clear group of assets and everything is treated in the same way which makes sense if you if you don't want to discriminate or to go into too much of the details on how the things are built issued et cetera et cetera and and of course there's such complexity and on the different assets that it really makes sense to have this broad approach but then you should be very very careful if you do that to avoid side effects and they obviously did not do this as we would like them to do as we would have elected them to do

so we've we've talked about the you know the the issues with with compliance we've talked about the listing of these tokens or the the ban on listing these tokens which is kind of the nail in the coffin and then there's just there's the part of this regulation that seems like such a middle finger to the entire crypto industry which is the affordances that this regulation gives to incumbent financial regulated institutions like banks describe uh what kind of leeway this regulation gives to financial institutions well it's really logical if you still again uh if if you have this broad approach of

uh the crypto assets being a new asset class in the traditional financial sector and having this view of the crypto asset actors as being some variation of the fine tuition financial sector actors then of course the conclusion is that yeah why not granting to all the traditional financial institutions a full access to crypto assets with no specific obligations and that's exactly what they did so basically if you are trading the new or if you are if you are a broker or if you are any kind of um regulated bank if you are any kind of regulated financial institution

under the eu regulation you will have automatic transcriptions of your activity to your closest crypto asset activity so if you are trading traditional trading venue you will be able to uh operate as a crypto asset trading venue if you are a broker you are able to be able to act as a crypto asset uh broker with no uh additional obligations with no delay and that's of course you should take the point of view of the crypto assets industry it's really uh it's really harsh because basically the the commission is narrowing the space

to what they understood it was and just bans all the use cases they did not see which is already quite bad but in addition to this they just opened the door to the crypto assets industry to all the traditional financial sectors actors which of course creates quite a big uh very quickly quite a big competition in this space of course if they are interested but which we will suppose that they are this means that basically any bank can create can can become a crypto asset custodian any uh yeah so it's it's true that it's seen as you know the final blow

for the crypto asset sector in europe for the actors that are already in place it's not very positive it is does seem like a final blow it seems very unfair to give to the existing sector all of the leeway to to be a crypto asset service writer without any of the red tape but also for companies and startup in the crypto space or who are entering this crypto space they will need to do additional steps like so they will need to register they will need to interact with the regulator in order to get the proper licensing uh et cetera and who knows what that's going to look like i mean if we have any if we have any you know experience with dealing with

administration in europe it's that things are usually slow and take a long time and and cost a lot of money so there might be some bottlenecks there that are like additional pains and costs for industry players yes i can only agree on this that there's you know the procedure and the cost of the procedure and everything is a high burden on on the on the newcomers the the crypto asset sector players that are trying to create this new sector of activity so yeah maybe just to to be a a bit less grim about the whole the whole thing please

uh yeah just on the bright side it's it i haven't mentioned it and i think it's important to do it it's still good that the crypto asset sector was seen as an industry sector that exists as a whole uh as a new kind of uh asset that can help reshape the financial industry in europe because that was the initial that that's where the whole regulation comes from right there's this idea that there's interest in crypto assets and they need to be regulated so they can grow in a more precise and yeah reassuring constraints but yeah it i think that the fact that

this regulation exists is still a good sign as being a recognition of the industry as a new industry i don't see it that way at all i see it more as a recognition of threat i mean i i see it as a recognition but it recognizes that the crypto industry is a threat to the existing financial sector it's a threat to incumbent players there might also be in there uh some consumer regular you know consumer protection uh and team anti-money laundering and sort of financial terrorism considerations but i think for the most part this was probably drafted to give recognition to an industry but also make sure that that industry you

know complies to the will of traditional financial sector yeah so i think the first part of your sentence is good and then it's less good yeah it's true i think you know it's always the issue when you create a regulation at uh at such a high level as the as the eu then you have so many actors that are already in the place right the incumbent players they have all the lobby uh all the all the the relationships they can uh in the commission and they they already know how to bring their ids to the to the commission and to make them understand what are their views on the subject

so of course the first draft could not be the perfect draft for the for the crypto assets uh sector still i think it's good that we have this initiative that it's really important to say that i'm not sure if we say that already it's the proposal of the commission it's the first step of the legislative proposal and from there there will be uh the parliament that will uh amend the text and there will be the council that will amend the text and then there will be the trilog where the three different institutions will discuss together to create the final version of the text

and there's probably a lot of room for change especially before the parliament uh maybe less before the conceal but still there's probably things to change at this stage also and i think the good news is that all the crypto assets players i've spoken to all but also the french regulator and the french actors and the french even the french financial industry thinks that this first version of the text is too stringent and not really good for innovation in europe and i think if we can convince enough in a short amount of time because unfortunately there's a very very short process

the procedure will be very very very quick we have a short amount of time to convince as much players as we can that this regulation should be amended this regulation should be a basically re-focused on the centralized actors and also make made more proportionate for these actors i think those those are the the two most significant things that need to change and those are arguments that can be heard by a lot of people right it's not stupid it's really it makes it makes sense if you understand the industry that those things need to happen so there's still hope i think and um and that's

what we are trying to do at the air then and and with different uh european actors to make the the text change and to make it a more suitable text for the whole industry so let's talk then about the actions that are being carried out by adan and um in coordination with other industry associations in europe yeah so there's a lot of initiatives the the first and the most obvious one was to of course uh raise our issues at our own national level we're based in france so of course we've seen uh the french regulator we've seen the french ministry of economy etc etc and we we raised our issues they were very receptive so it's a good

day it's a good first sign i would say and then we are building cooperation between uh different associations and industry players in europe as broad as possible to help them also raise those issues at their own national levels and together we would like to raise same issues at the eu level which is quite a challenge because we have um a few initiatives existing in europe already that that raised the voice of the industry at the eu level but not really like an organized lobby that would be already introduced and that would be able to pass those ideas with

the with the legitimacy of uh industry body but still they are really looking forward hearing from the feedbacks from the industry so as soon as we can reach them and bring them those issues we've raised they should be at least listening to us i think the main challenge we face is more like education challenge right because uh it's really difficult for someone who has not been in the crypto space for a long time to understand how different uh those decentralized use cases are from the centralized actors for for the whole uh defy space and how critical are the

stable coins in the crypto space economy right now and those two points uh need to be completely understood by our interlocutors before we can go to the next level and make our proposals so that's one of the reason why uh the actions we are planning for include a huge focus on education and and maybe it's more explaining our vision than you know sending them drafts of amendments that would not make sense for them what are some of the things that like people listening to this here whether they are in europe or

or even you know in the us or anywhere else if they have users in europe um or if they're issuing a token that could potentially reach eu users there's a high chance that they will be affected by this regulation in one way or another what is your message to you know founders of companies uh people who work in the crypto space in order to have this regulation be uh amended in time uh before it gets passed and potentially um you know wreaks havoc on on the crypto industry in europe but also i think it may have reverberations outside of europe yeah uh

well i would say uh reach out to us first i think the initiatives needs to be a bit coordinated at a minimum just that everyone uh knows what are the big timelines who are the interlocutors that needs to be to be actioned who you can talk to who is uh uh who will defend our positions who is uh uh who is opposed to the crypto assets industry etc etc so it's very important that we talk to each other and that all initiatives are are made in in general if you don't have a clear idea of what you want to do if you don't have any initiative in mind we can help because we have

we are in the process of structuring a really focused initiative that would be the voice of the industry at the eu level and any help would be very much appreciated that whether it would be in your time in your knowledge or even the financial help because it's very costly to reach out to the eu you need to you need to pay different interlocutors to be able to reach richard to do the right person and i think either you can uh reach out directly on the eu and the eu sector or if you want to help bringing more awareness on the industry in general in europe and you want to help

the air then you can also of course become a member of the association and then uh the fees you would pay as registering as a member would help for all those actions at the eu at the french level so of course yeah i would i would uh i'm going to put my my adan hat on now and uh i'm going to say that you know anyone who's who thinks they may be concerned by this whether they are in europe or they have any dealings with europe and are in the crypto space should probably be uh just sign up for the ada newsletter we send out a newsletter every month where we kind of outline all the things that we're working on and that's a good starting point to get some more knowledge and get

more in touch with what what's happening at the eu level and of course whenever we host events or you know publish blog posts about these topics you'll get that newsletter you can get the newsletter at adan.edu that's adan.edu you'll get a pop-up when you sign up and and of course you can also reach out to the association um through the website we'll certainly be glad to speak with you about any concerns you might have but also ways in with in which you can help but yeah the newsletter i think is a great resource and it goes out once a month it's it's uh in french and in english it's quite concise and is a good um way to keep your finger on the pulse you know one one maybe final thoughts to end

on here and i want to want to talk to you about this a little bit is like if in five years from now for example you know mika has passed and it looks a lot like the regulation that we have seen so far right if if it's hard to get those amendments through and we basically get this regulation that stifles innovation in d5 do you think there's an opportunity to create a totally alternate crypto ecosystem a crypto ecosystem that would emerge organically as you know outsiders of this regulation and create a truly parallel financial system to what we have today which is kind of like the you know the starting goal of of defy and the crypto space do you think that there's an opportunity for

that i think it's it's quite possible right because the tools are already there to create uh use cases that do not really need regulation to exist the the pain point is really like the entry point and the exit point right if you you want to buy cryptocurrency for the first time you need an entity that has a link with the traditional financial sector but as soon as you're in you have all the tools already in place to have your whole financial life that you can create stable coins you can exchange coins again ones against each other you can create derivatives you can loan you can borrow those all those use

cases already exist and they can't really be stopped by uh eu regulation so it could very well be a side effect of misplaced regulation that all the innovative side of the blockchain space becomes a shadow side of the of the blockchain space in europe specifically and in in parallel there will be the whole you know traditional financial sector that would take its place in the eu market with all those uh affordances they have um so it would be it would be quite a strange situation where all the crypto assets uh proponents would be pushed out of europe and would probably build those

products with legal entities that are located outside of europe just to avoid any kind of risks and all the users would use them from europe with no limitation because it's destroyed just cases right and then you would have all the incumbents that would enter the markets and just provide very simple services like buy and sell crypto assets that would be fully regulated so that would completely change i think the the face of the market if um the regulation would apply as it is right now and that's that's that's a funny thought because uh that's already something we've seen with uh

the the problems we have with the opening bank accounts you know there's it's already a big issue in in france specifically but i know it's the case in a lot of different european countries if you have crypto assets it's very difficult to open bank accounts because banks don't want to deal with crypto assets in general so more and more with the tools that are existing i see that members of the aiden new members they are asking me if they can pay in stable coins directly to the fees of uh for becoming a member because they don't have a bank account they are already out of the system right they are they've built all their use case uh without a bank account they're financed

by crypto assets they pay with crypto assets and they don't need bank accounts so it could very well be that this regulation if it's not amended to be more suitable for the crypto asset industry it will accelerate this movement and create entities that are completely out of the system and that operates without a bank account without any link to the traditional financial sector because they won't need to do it and and they won't be able to do it that's i think it's a good note to end on at least maybe there's some some positive outlook here anyway uh we'll link to the then website the newsletter also

uh we recently hosted a webinar about this very topic in which we go into you know lots more detail about the technical aspects of this regulation which i'll also link to in the show notes it has the the webinar itself the slides and a nice recap so that's a nice uh amendment to this podcast simon thank you very much thank you sebastian thank you for joining us on this week's episode we release new episodes every week you can find and subscribe to the show on itunes spotify youtube soundcloud or wherever you listen to podcasts and if you have a google home or alexa device you can tell it to listen to the latest episode of the epicenter podcast go to epicenter tv subscribe for a full list of places where you can watch and

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