Rarely a day goes by where the upsides or downsides of various crypto assets are not discussed and debated by financiers, regulators, or technologists in the worlds leading newspapers and social media. And the debates can be intense. For some, crypto assets come close to a technological panacea. Cryptocurrencies such as bitcoin, or smart contracts on the Ethereum platform, promise to swiftly disintermediate traditional finance, and usher in technological revolutions comparable to the rise of the internet. Meanwhile, for others, crypto assets are at best fraudulent, and at worst sources of financial instability.

Differences in my opinion starts with the very name of just what to call these new financial products. If we think crypto assets as an investment product, utility, or payment instrument, what you call an instrument can necessarily lead to conclusions about whether (and how) one should regulate it. If its an asset, commentators immediate opine, should it be taxed like property? Or if you call it currency (such as “crypto currency” or “virtual currency”), then conceptually, you think about it just as that – and with all the attendant economic, tax, and regulatory consequences for finance ministries and others. 

And if you call it something else – say a “derivative” to the extent to which any transaction requires time for the delivery of a crypto asset due to mining or data processing – another regime or framework will come to mind. In all, if you are not careful, the question one poses about crypto assets quickly becomes the answer, even when you are just grappling with defining what you are trying to study.

For a common ground point what crypto assets have in common is that they depend primarily on cryptography and “distributed ledger” technologies to memorialize and track transactions. Cryptography refers to algorithmic techniques used to protect information by encrypting it into formats accessible to individuals only if they possess a special key. Distributed ledgers, meanwhile, are databases that store records through a peer-to-peer network of computers that is not confirmed by any 

one entity and is manager by multiple participants. 

We should highlight some concepts first, in this regard crypotassets are used in many ways and are generally catalogued as comprising either a medium of exchange (“digital money” or “cryptocurrency”), devices for accessing an online service (“utility token”), or investments – or all three at once. As a medium of exchange cryptoassets can take the form of digital monety and as such may be accepted by persons and market participants in commerce. By contrast, as utilities cryptoassets are like tokens in a pinball machine in an arcade – you use them to access something you want to use, whether it be an online game or cloud storage facility. Cryptoassets can also constitute investments and are even used to raise capital through for example initial coin offering (“ICO”). Finally, cryptoassets have an operating system driving the way cryptoassets are transferred, and records stored, is a special kind of distributed ledger system called a blockchain, which links transactions together as time goes on and more transactions can take place¹.

Regulation at EU Level

In September 2020 the European Commission (the “Commission”) adopted a legislative proposal for Regulations for markets in cryptoassets² and on a pilot regime for market infrastructures based on distributed ledger technology³ (the “Regulations”). The proposed Regulations are part of a broader digital finance package introduced by the Commission to enable and support the potential of digital finance to boost innovation and competition, while at the same time mitigating risks stemming from it. This proposal takes into consideration advice received from the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). For both cryptoassets and distributed ledger technology (DLT) market infrastructures the Regulation has four overarching objectives:

• To create legal certainty – a robust legal framework that clearly defines the regulatory treatment of all cryptoassets not covered by current legislation is required.
• To support innovation – a safe and proportionate framework that supports innovation and fair competition is needed to promote the development of cryptoassets and use of DLT.
• To ensure appropriate levels of consumer and investor protection and market integrity – as most cryptoassets are unregulated, this is of particular importance.
• To ensure financial stability – some cryptoassets bear the potential to become widely accepted and embedded in the financial system. Consequently, safeguards are required to address risks to financial stability and policy that could arise from these cryptoassets.

The Regulation will cover all cryptoassets not currently caught under existing financial services regulations. The Regulation lists them as follows:

• Cryptoassets.
• Utility Tokens – a type of cryptoasset that is intended to provide digital access to a good or service, available on DLT, and is only accepted by the issuer of that token.
• Asset-Referenced Tokens – a type of cryptoasset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several cryptoassets, or a combination of such assets.
• E-Money Tokens – a type of cryptoasset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender. They will be treated and regulated as e-money under the Electronic Money Directive 2009.

After such Regulation was enacted by the Commission, Luxembourg and most of the EU members states have opted to self-regulate with different administrative proposals by their home public authorities before any directive is enacted for mandatory transposition by the Commission. The self-regulation has been very cautious and conservative (most for crypto currencies and tokens) and for the Luxembourg case the virtual assets and the exposure of investment funds⁴ for being the Europe’s number one international fund distribution platform with international outreach. 

Conclusions

Cryptoassets are if nothing else, controversial. They pose considerable risks regarding volatility and market integrity as common concerns by all the skeptics.

From my perspective, cryptoassets advocates cite several potential benefits associated with cryptoassets that if realized could prove transformative for the payments industry. Blockchains, for example, are often described as immutable – unable to be edited or deleted – thereby allowing in some (though not all) instances greater security than traditional banking systems. Furthermore, because cryptoassets leverage peer to peer infrastructure, they enable applications across borders at low costs, and are poised to transform international remittances. 

Crypotassets are also supported by highly decentralized blockchains and operating processes, enabling open and transparent points of access for stakeholders; all the while, nongovernmental and private cryptoassets operate independently of central banks, and as such are subject, according to proponents, to less political manipulation.

The puzzle becomes even more difficult given the virtual nature of there assets, and the fact that they are digital instruments, tradeable and transferable online. Cryptoassets are routinely released and traded throughout the world and can be accessed in terminals strewn across jurisdictions and to far fling parts of the world. Different countries may, furthermore, have very different conceptions as we have seen to just define what a cryptoassets is, and how it should be categorized and regulated. Galvanizing a global, coordinated strategy is difficult, if not impossible, with stakeholders and even countries initiating the regulatory process from very different vantage points.

Finally, I contend that cryptoassets have as one of the bast potentials to disintermediate an oligopoly of intermediates dominating the legacy of the financial system challenging the longstanding economic models and regulatory strategies in order to shift the paradigm in the near future.