When regulation meets vision: what the EU should learn from the US

Transcript

Hi everyone, really happy to be there. Thank you for taking your coffee post lunch with me to talk about regulation. I'm Christine Flore, I'm head of public affairs at Morpho, previously of Adan. So, really passionate about regulation for a very long time. And my goal for now for the next a little bit less than 20 minutes will be to speak about policy at both sides of the Atlantic, both in the EU and in the US when it comes to crypto regulation and especially DeFi regulations because there are lots of things being done and be lots of things to be done in the next months and years.

And so, it's very important for you to know to to be aware of that because at some points you as industry players are part of this process with policy makers of shaping this policy environment for crypto crypto actors. So, It works. Okay, I'll push strongly.

Okay, so first I know that you are all really knowledgeable about crypto and DeFi, but if we have to take a starting point and that's the one that I usually take with policy makers, public policy makers, but also financial institutions is to explain that crypto and especially DeFi is not a side word of the financial word that is being reshaped today thanks to new technologies. So, usually they are much more knowledgeable about tokenization, about centralized markets, and so they can see DeFi as a niche and that's something that leaves apart from the traditional financial sector and it's not. And so, usually the first things to do is to re-explain why we are talking about tokenization, how we are

going heading to DeFi with this process of tokenizing finance, and why actually everyone from policymakers to financial institutions and banks should pay attention to be conscious of what's happening because tomorrow they will be part or not depending on if they seize this opportunity to to to participate to tokenizing finance. So, usually the way that I like to maybe simplify but to explain what is tokenization is to explain that we are in the next wave of digitalization of markets because you all know that we already have digital finance in the way that we have of course we have notes, we have coins but we have money scriptural

money, the financial instruments are represented represented digitally no longer on papers. And actually in France there was the obligation to digitalize markets in the 80s. So, we already live in a digital financial world but the layer are centralized technologies, proprietary technologies that at some points are not that efficient, not as efficient as blockchain technologies. And so, when I speak about tokenization I explain I summarize that it's a let's say digitalization 2.0 of finance. We had digital markets on on centralized technologies and now we are heading to we are shifting to

another technological paradigm with blockchain technologies and finance is currently moving on this new layer. And so, actually why what's the their question afterwards is why are we heading to new technologies while we already have those financial markets that are running well quite well. They're not perfect but they are running. And actually it's very important to explain why institutions must be on board and what's their interest behind tokenization of finance. So, I know you are all very very expert in blockchain technologies and crypto assets, but if we have to sum up the value proposition of tokenization of finance, we could leverage those points. So, first the fact that markets can run every second of every minute of

every day all along the year and that's something that does not exist as of today. The fact that they can have atomic settlement, atomic payments, so instant operation, which is actually can take some days in some segment of the finance today. The fact that you will be able to automate, so to get escape from human failures, from subjectivity of humanity thanks to automatization through smart contracts and that's something that strengthen the efficiency of of market. Obviously, let's say the crux of financial markets the liquidity, which will be more globally accessible and defragmented. Obviously, transparency, traceability, etc. etc. So, at the end, if we are talking about tokenization,

it's because it brings a lot to finance and that we are already moving to this new financial paradigm and those new oppor- seizing those new opportunities of blockchain technologies. And so, what is DeFi in all of that? Actually, if you are bringing finance on blockchain technologies, you are actually you actually need a new layer, a new technological architecture. And DeFi is here to be this new paradigm on which you will be able when you will be issuing and you will be trading value on blockchain technologies, you will be able to leverage all the opportunities of DeFi protocols and what they can bring in terms of new financial services, new services that can be powered through protocols rather than

intermediaries. So, if we want to show it simply, we have this paradigm as of today where the back end of financial intermediaries are segmented, are proprietary, and so it's really inefficient if it comes to accessing global liquidity, if it comes to collaboration also. And so with DeFi, we're actually actually moving to this paradigm where the back end will be unified and powered by by those those blockchain technologies and where all those financial institutions and banks will be able to plug and will be able to access. So that's something usually that they are not aware is that DeFi is not competing with intermediaries, but intermediaries will be which will be using DeFi will be

competing with those which does not use DeFi. And that's very important for them to understand that they actually have to to take part in helping the growth and the development of DeFi protocols. So maybe you learned nothing from here cuz cuz you're in the crypto sector, but well, but lots of institutions, lots of policy makers are still to understand what's happening in terms of tokenization of market, in terms of the growing the growth of DeFi. And so as I said in the introduction, both in the EU and in the US, policy makers and institutions are actually thinking about what do we need in terms of regulations, in terms of policy in order

it depends on where you are to help the development of this industry and I would be on the US side of the Atlantic when I say so or how to mitigate the risks, the new risk of this this on-chain finance and that will be more the vision of the EU. And so I will both address EU and US approach to crypto and DeFi and what you will see that it's not difference. The main point is not the difference in terms of regulation, but actually the difference in terms of vision that we can have or not depending on where you are in the EU and the US.

So actually in the EU, we are already addressing regulation of crypto markets for a very long time cuz if we take, let's say the genesis block of MiCA, it will be the consultation launched by the European Commission in 2020 and then MiCA with the whole legislative process in the EU was implemented in 2024. So, it takes a long time, but we have a framework, a regulatory framework for centralized crypto markets. So, those crypto asset service providers, if you already saw this technical legal concept, those actors providing services, investment services on crypto assets like custody, exchanges, portfolio management,

advice, investment advice, etc., etc. So, that's something that is already very live cuz nearly all actors need to comply with MiCA as of today. I say nearly all because there is a tolerance period for for some and including French actors which they benefit from a period till June, the end of June to be able to comply with this those EU requirements. And MiCA is a very, very big piece of regulation, very burdensome if you take especially newcomers.

The goal behind and for regulators, what was the purpose? It was to to make sure that we ensure investor protection, the fight against market abuses, the fight against financial criminality and financial stability in Europe. That was really the focuses of policy makers in Europe. And so, it's a very a massive a massive regulation especially for those newcomers in the crypto sector, the native actors which have to deal with that. But actually, we we usually forget that behind MiCA, there are lots of other regulations. So, when you are a crypto actor in Europe, you don't only have to comply with MiCA, and so all those dedicated rules because you are

doing you're providing a services on crypto assets, but also lots of other pieces of the EU legislative framework when it comes to cybersecurity, when it comes to information sharing in terms of taxation, etc. So, not only the specific crypto regulation, but also non-specific crypto regulations for, let's say, financial stakeholders that may not those financial stakeholders have to comply with in Europe. So, it's not only about MiCA, it's about lots of regulations, and it's very important for policymakers to remember, and that's something that we have to tell them again and again. Um financial institutions and bank, when they grew, they grew with regulation. I mean, first

they went there was no regulation, there was a first one, and then it was a bit sophisticated, etc., etc. Uh so, it grew with the industry, the banking industry, the traditional industry grew with regulation, and that's not the the case with the crypto industry, which has to comply with everything at the same time. Uh while you are for some like 3 years old, 5 years old, 10 years old. So, it's it's very difficult. I mean, for new co- comers to enter the EU market now that you have MiCA and all those regulations applying to them. And so, we said they there was MiCA, there is not only MiCA, and there will be no there won't be only MiCA. I mean, there

is already a work done by the European Commission to think about strengthening this framework for crypto markets. Um and so, we we are engaging a review of like, I think, 14 pieces of financial regulations in Europe, including the DLT pilot regime, including MiCA. So, for those centralized actors which already have to comply with those requirements, but also for new actors, and maybe DeFi actors, which at this stage are not tied to any regulation. And it was a a smart move from the European Commission at the time MiCA was debated because they realized and they were aware that DeFi was quite small, that was niche, we

were not with volume and values comparable with uh uh with the traditional financial sector. They had to understand lots of new things because we cannot apply the traditional regulatory paradigm of intermediaries in the DeFi world. So, at the time of MiCA, they decided like to to wait a little bit. But, because they are maybe engaging a MiCA review as soon as next year, DeFi will be on the table of of the discussion. And that's a big problem because in those past years where all those this regulatory work was done, there was something that was not developed is the EU vision. We're still lacking an EU vision behind the the Web3 in general, crypto, and DeFi.

Um and that's something that makes a huge difference with the US. Um why? Because in the US, regulation will be the support of a vision, and the vision is simple in the US is to make the US the global hub of crypto. And that's something that we don't have in Europe and that even if we worked a lot, policymakers worked a lot on the regulation of crypto actors, we're still lacking they are still lacking to understand why they are doing that. And the reason that they're regulating it's merely because it's not regulated. And it's not enough as a reason. And at some point, maybe there are some layers and especially in DeFi that must not be regulated, that cannot be regulated. So, the biggest problem that we will have in

the EU is this lack of vision, this lack of strategy. That in the US we really developed for the past year with the election of Donald Trump and lots of pieces like the executive orders, the strategy that was published in last July etc. etc. Also in Europe, we do not we don't share the same bet as in the US when it comes to what will be the settlement and payment layer tomorrow of this on-chain finance. Europe decided to bet on the digital euro and really MiCA was here to limit the development of euro stablecoins rather than developing it and at some point they they start to regret this strategy. While in the US, they are really aware of the powerful

environment around US stablecoins that they have and they really want to encourage the the US stablecoins to develop even more and to be to to remain the hegemonic asset in in the on-chain monetary system, let's say. So, we are really lying behind on the stablecoin thing. It's also because I spoke about what is tokenization and well, at some point in Europe, we we are thinking that it's an experimentation already. Still still an experimentation, sorry.

While tokenization is ongoing and there are already lots of institutions that are doing lots of things, tokenizing financial products and going on-chain. And it's really clear when you see the rationale behind the DLT pilot regime. And the Europe is thinking that we still need to check whether tokenization is is a trendy or is a sustainable move. And that's really something different compared with the US. I spoke about the coming MiCA review next year. We can think that maybe it's a bit early when we think that MiCA was implemented only one one year ago and that for both actors and policymakers we are still learning with doing. And so, maybe

we are rushing into regulating even more while we are still lacking this this vision. And lacking lots of also resources to be able to implement this regulation. And when it comes to DeFi, there is no exception. I mean, we don't have a clear vision of why we should develop competitive attractive EU crypto markets. And actually, as we are starting to discuss about DeFi regulation, we are lacking also why Europe is should regulate DeFi to make it competitive and to make it attractive.

So, that's why we have to pay attention to in in in the coming months. So, I already spoke a little bit about the US and I see that time is flying, so the main difference will be that it's accelerating in the past few months and it's going very fast. When I say MiCA, we needed like 5 years to be implemented. The first framework for stablecoins in the US was debated in like 6 months, 8 months maximum before being being adopted at the at the US Congress.

And so, we see that if the US is now well, leaving this word of law by enforcement and making the regulatory environment more clear, more more stable, they can do it really fast and we will like maybe the only advantage that the EU had with this legal clarity with with MiCA. There are very very important debates right now with the Digital Assets Market Clarity Act which will be the framework for digital asset service providers, which is uh already dealing with some DeFi language. So, it's really important to follow even if at this stage it remains stuck because of the stablecoin yield issue.

Maybe you you heard about that. And in the US, we have much more institutional adoption. I don't have time to review all the examples, but as you can see, banks, financial institutions, asset managers, payment networks, they are all already tokenizing and migrating uh on the on blockchain technologies. Anyway, maybe the EU has its uh um as a chance to catch up and maybe we lost some battles but not the war because there are several uh several um uh milestone in the US political life that can be a big uh that can have a big impact on the crypto policy. And actually we in the US have a short window, favorable window, in order

to to implement favorable crypto policy because with the midterm election in November it's barely sure that there will be Democrats uh gaining some uh maybe one chamber at the Congress and so we know that they are not really favorable to crypto. So, well, if there are there are things to be done, it has to be quickly in the US. Otherwise, it will be much more complicated at the end of at the end of the year. So, and as I said, as the Clarity Act debates are stuck as of today, as long as it remains stuck, the less chance we will have to have a uh a regulation to pass this year. And afterwards, it will be much more complicated or disfavorble if Democrats

are taking the lead. Uh I don't know if I have time uh to to to give all the uh all the recommendations that we bring to policy makers, but uh if you have time to read it before I am uh uh pushed out of the stage, uh the goal is that uh we have the chance now because the debates are ongoing on DeFi to to be part of that as industry players. And they are um let's say key principles that we have to push them as soon as now uh in order to make sure that this regulation, which is to come, is the best and most appropriate uh possible for uh for the EU DeFi industry. So, I don't have time to develop more. I'm sorry, but I would be really happy to

answer questions and to uh follow up with more discussions after this talk. Thank you very much for your attention. Well well well.