During the “Innovation and regulation: The French approach to cryptos” – 3rd Annual Fintech Conference – Brussels, on February 26, the AMF President Robert Ophèle said a speech regarding the future and regulation issues for crypto-assets. We share the keynotes.
Although regulations may seem to stifle innovation, the lack of regulations paves way for the fraudsters and hackers. Whenever hackers and con artists thrive, the confidence and trust needed to make innovations successful are destroyed. Straightforward prohibition and administrative burdens are known to discourage innovations through the set up of many safeguard requirements, in the end, emptying any business case.
The AMF president expressed that regulation is an important factor for customer protection where financial services are involved. The primary reason why the financial sector is highly regulated is to ensure people, institutions, and governments do not lose their money. The stringent rules also act as a barrier to entry for new competitors.
With the rise of cryptocurrency, the past ten years have featured the introduction of many new regulations especially in the financial services business including asset management, banking, and post-trade market infrastructures. With many of the large financial institutions influencing most of the created regulations, it makes it hard for any innovative entrants to challenge these incumbents.
According to Robert Ophèle, the financial industry is similar to the pharmaceutical industry with few big incumbents that are not very innovative suppressing the smaller innovative start-ups busily developing new products to enhance the industry. In that case, the major financial institutions globally are either developing their in-house digital tokens or collaborating with reasonably successful cryptocurrencies.
In the field of financial services, a particular variety of the usual triangle of incompatibility must be implemented to get a viable solution between profitability, innovation, and regulation. A solution is necessary to minimize the cost of financial intermediation to achieve profitability. Finance requires innovation to enhance all the services provided significantly.
The European Union has developed a Fintech Action Plan to foster innovations in a regulated environment and Roadmaps are being elaborated. The Commission has invited knowledgeable and experienced authorities at Member State and EU level to take initiatives to foster innovation based on identified best practices.
Crypto-mania Have Faded
The president indicated, that France has come up with a customized and tailored framework for crypto-assets that are currently not financial instruments at the EU level. Robert Ophèle said:
“2019 is the ideal time to set these regulations since the late 2017 and early 2018 crypto-mania seems to have faded away and markets are relatively stable.”
The combined market capitalization has plunged by around $700 billion from the 2017 peaks.
The value of Bitcoin has epitomized this plunge even as the crypto winter prolongs and the bears rule the markets. The collapse is a natural stage of the crypto innovation process according to the Gartner hype cycle. The current phase of disillusion followed the phase of overly inflated expectations.
Gartner hype cycle. Clients use Hype Cycles to get educated about the promise of an emerging technology within the context of their industry and individual appetite for risk. https://www.gartner.com image.
In the case of ICOs, many investors and even scammers have found a quicker, cheaper, easier way to raise money while simultaneously avoiding any dilution of the share capital of their company. However, according to the Gartner hype cycle, the phase of disillusion is followed by a slope of enlightenment and the plateau of productivity.
the Unicorn program, the nature of programs innovated has evolved
considerably from just pure tech to many other sectors. The
regulators are trying to determine the middle ground by first
grasping the structural trends that underlie the entire crypto-asset
First, the importance of the DLT technologies particularly blockchain was brought into the limelight by the popularity of bitcoin. Since then, other DLTs have come up in the public, private, permissioned or permission-less forms. The development of these technologies is, thus, based on network validation. The crypto-assets mostly involve the possibility to transfer value in a secure way through the internet.
Some of the notable trends in the crypto field include the platformisation trend, automatization of processes, and the ability to lower the cost while increasing speeds of financial transactions. These trends prove that the entire crypto-asset field has a long-term structural development that may reshape the way capital markets function.
An Extensive Legal Framework for Crypto-assets is Being Finalized
conviction led the French government to create an extensive legal
framework for crypto-assets that are not yet captured by any of the
current regulations. This framework is at the moment being finalized
in the French parliament. Some of the innovators
are working with the authorities to come up with the best
the best regulations to be developed, new risks merit an appropriate
comprehensive response to the crypto-asset phenomenon should be
adopted, and an innovative regulatory approach should be implemented.
the crypto-asset environment is growing in a large legal vacuum, the
optional regime will become the first regulatory strategy to debunk
the uncertainty. This new regime, if implemented correctly, will
offer better investor protection increasing the rate of innovations
without compromising on security. The optional regime also gives the
crypto environment time to develop as the authorities also create and
strengthen functional and updated legal infrastructure.
the crypto innovations to succeed as the authorities come up with new
regulations continuously, all stakeholders must work together to
reduce fraud cases in the industry. More innovative ways to fight
fraud are necessary while simultaneously raising investor awareness.
Since technology costs are high for everybody, sticking with a
status-quo is significantly easier to manage.
learning curve in the blockchain field is quite steep which makes it
challenging to have ready solutions for every issue that arises from
the outset. The most challenging issue lies in the crypto-assets
custody. In the past few months, the security tokens have gained
popularity. A new phase of high expectations for the STOs may be
looming and needs to be regulated in an innovative-friendly manner.
The financial assets tokenization could be beneficial for the long-term structural trend that will transform the global financial industry including the post-trade industry. ESMA explained some of these benefits within its advice on ICOs and all other crypto-assets published in early January.
Thus, the European co-legislators should come up with types of activities that qualify as financial activities under the European Union regulatory framework in a DLT framework.
Apparently, European Level 1 measures, Regulations instead of Directives, are required to address such issues. Also, the lawmakers should also listen keenly to the legitimate aspiration of traditional market players to guarantee more regulatory stability.
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