#7: State of the EU Crypto Industry: MiCA, Tokenisation and What Comes Next

00:00:02: Hello and welcome to another episode of Fintech Stories, Channel Wrestling's podcast which explores the latest legal regulatory developments trends in hot topics in the fintech sector from across from the evolving mecha regulatory landscape, development and tokenization front to what comes next for the e-regulatory framework in markets of crypto assets.

00:00:33: I am pleased to be joined today by Roland van der Stappen head of EU policy at Coinbase.

00:00:38: Roland welcome to this show.

00:00:40: tell us a few words about yourself.

00:00:50: I've always been interested in fintech, so very glad to be at Coinbase now or to be a frontier of finance and share some thoughts with you today.

00:01:04: Great to have you Roland!

00:01:06: So let's kick off... Coinbase was one of the first regulated crypto asset service providers even before Mika time, so for those not familiar with your history back in twenty-one coinbase.

00:01:18: The very first institution Germany which obtained a special license under the German banking act as a cryptic custodian.

00:01:26: As of December last year Mika framework is applicable in full and the traditional periods that some of your member states had the possibility to introduce an exercise this possibility are coming to an end in June, This year.

00:01:39: In this new regulatory environment you're now fully licensed CASP with headquarters in Luxembourg if I'm not mistaken.

00:01:47: can You please provide us With some insights into Your experience with Mika framework so far And your experience Of operating in the EU since The mika go live date compared To times before.

00:01:58: Yes So Indeed, we obtained our Mika license in Luxembourg last June just before the end of the grandfathering period.

00:02:05: In the first member states like notably Netherlands and Italy.

00:02:08: for us And you can kind of say that Mika has both been a defensive play for us because it's kind of preserved the ability to condeserve servicing our existing customers but also positive allows now to market new customers where we did not have a registration before and obviously the main benefit has always been the ability to passport.

00:02:32: But we also say Mika has been the biggest compliance lift this company have ever seen and being Coinbase, I'd be like a global company for us.

00:02:42: The focus is always on finding balance between keeping the benefits of our global operating model with need for local control meeting Mika requirements And particularly saw the need to strike their balance on two key issues one on the custody side, where we kind of run like a global distributed infrastructure which we think improves security and resilience but also obviously needed to assure our European regulators that this allows for EU control.

00:03:15: Have you all seen it in the broker model site?

00:03:17: Where are?

00:03:18: focus was always allowing us continue access to global liquidity showing kind of met, you know best execution requirements.

00:03:30: I think beyond like just changes to our global operating model to some extent Mika has also already impacted are offering.

00:03:38: i think we've all seen the delisting off non-Mika compliance stablecoins.

00:03:43: does someone cast actually still do provide access uh...to them?

00:03:48: um white papers will say introduced since then and be unfortunately had a stop providing earn on stablecoin, something we hope to correct under Mika too.

00:04:00: And then I think fair to say that innovation has not stopped since the Mika framework was finalized.

00:04:08: You also see now a lot of CASP offering like crypto land and borrow perhaps access to decentralized exchanges.

00:04:15: all these products services kind of exists outside the parameter off Mika because Mika did no touch on DeFi and beyond that, I think you know also see CASP offering derivatives or equity to customers.

00:04:32: So for us it's no longer only about Mika.

00:04:35: Yeah so let's zoom out first.

00:04:37: second maybe looking at the Mika framework in your experience with it so far What do you think?

00:04:42: How is the position relative to other key jurisdictions around the world like the UK That is slowly but surely finalizing their own regulatory framework and crypto assets As well as the

00:04:52: U.S.,

00:04:53: that is especially in recent months, sort of an accelerated path to create a long-awaited national regulatory framework.

00:05:03: I

00:05:07: think it's fair to say that other jurisdictions like the US or UK have a second mover advantage, though i guess we'll touch on that later.

00:05:15: You will already start reviewing Mika before actually end of the Grand Fodding period but also fairly said that Mika got alot right in particular for rules for casps like ourselves struck slightly wrong on the stablecoin rule site, but obviously you need to kind of account for the fact that e-stablecoin rules were developed in the aftermath of Libra.

00:05:44: So they are conservative.

00:05:48: as a result we do see like lot of differences and also understand again there's an international level for kind of realignment and having common standards.

00:06:00: Just to give a few examples, I think if you look at the Genius Act with allow for hundred percent HQA as reserve assets whereas EU has thirty six per cent recurrent for these reserves to be held in bank deposits which are more perspective.

00:06:18: If you again recall Silicon Valley Bank, this is Les Prudents that actually introduces a risk for stablecoin issuers then in the UK have an interesting debate now to also allow for excesses and the bank emergency liquidity facilities always be liquidity with not a really solvency issue.

00:06:43: So I think lot of jurisdictions are approaching stablecoin issues differently and there's need for kind of realignment, but on the GASP side i think largely aligned.

00:06:57: Yeah, couldn't agree more.

00:06:59: one should also treat sometimes regulation as an enabler off innovation in that only is risk management tool.

00:07:05: so to say Okay, moving on to the next topic.

00:07:10: Since the Mika Go Live date we have witnessed rapid evolution of the Mica framework first through finalization level two legislation and throughout last year especially through level three guidance issued by European supervisory authorities ESAS.

00:07:27: There are many topics that ESAS has tried provide some clarity from reverse solicitation to staking copy trading practices.

00:07:36: one guidance provided by European Banking Authority, EBA in a rather unusual form of no action letter was particularly loud and striking for the industry which is the EBA No Action Letter concerning the interplay between PSD-II and MECA framework.

00:07:52: In a nutshell end June last year EBA confirmed what some in the industry have been anticipating quite sometime that against backdrop that eMoney tokens are deemed under MECAs eMONEY under EU law certain crypt asset services providing a relation to EMTs effectively constitute payment services that as such can only be provided by regulated payment institutions and e-money institutions.

00:08:19: What are your thoughts on this?

00:08:21: Do you believe that this caught the industry off guard maybe, And how is your institution preparing for this new regime which has date of recording at this episode actually already applicable?

00:08:32: right

00:08:33: Yeah, this obviously put a lot of stress on firms to pursue both amica and email license at the same time.

00:08:40: You know first the grandfather period was too short.

00:08:44: The second delay is only available in countries that had longer grandfathering periods for on the casp side so there's also an unlevel playing field There.

00:08:54: from a coinbase perspective we received like a partial So an EMI license for those empty transferred payment services just in time and I've also seen some other.

00:09:05: NCA is kind of taking the same pragmatic approach to avoid disruption.

00:09:11: I also think the EVA did get some things right, like also like you know healthily explaining that Mika Kasteli requirements would continue rather than you know the PZ-I's replication.

00:09:24: Also healthily saying maybe overbanking requirements do not apply to us yet and may be the biggest lifts i will say might have been on the SCA as a side but this is particularly troublesome from smaller casts which we may two licenses at the same time and in Coinbase being one of the bigger ones, we even found this a challenge.

00:09:50: Do you believe that especially when it comes to smaller CASPs?

00:09:52: That we might see the surge in establishment of cooperation arrangements between smaller CASP's and payment institution CMI's?

00:10:07: Yes, I think that's fair.

00:10:07: I think from our discussions with the EBA they did refer to an Asian model potentially being a solution for them.

00:10:14: but then it is also question of liability and costs for those smaller players too.

00:10:21: Yeah yeah certainly.

00:10:23: So looking ahead You have touched upon a bit in your previous responses as well, but the European Commission is expected to launch a consultation shortly.

00:10:32: So according to latest information into coming weeks actually that shall format basis for its long-awaited report on the functioning of MECA framework under article hundred forty MECAA.

00:10:44: What are your expectations from this?

00:10:46: forthcoming review process and where do you think the commission was most likely to focus in assessing how Mika is working at practice?

00:10:54: And consequently, what might be some areas that might be regulated or fine-tuned as part of a possible Mika?

00:11:04: two point oh

00:11:06: So yeah, I also understand this is expected in the next few weeks.

00:11:10: And from speaking to commission i think they will leave no stone unturned and it's going be a very comprehensive review.

00:11:18: but i do expect that political focus will predominantly on stablecoin side Also because of continued discussions around.

00:11:29: you know the multi-issues model for global stablecoins weaknesses there.

00:11:35: Also mentioned like stablecoin requirements, to ensure competitiveness of Mika vis-a-vis the Genius Act or the UK regime and I think you know that areas were not touched last time.

00:11:49: in particular DeFi will also come in focus on the DeFi side.

00:11:54: i think it would predominantly be what we call intermediate DeFi over Casps act as gatekeepers for DeFi product services.

00:12:04: I would expect some questions and proposed measures there.

00:12:09: Okay, so it remains to be seen now what's going In common financial institutions, payment companies and emerging fintechs?

00:12:32: everyone is kind of trying to establish a footprint in the stablecoin space lately.

00:12:36: Uh...in the EU as of date for this episode we have four de-registered issuers of e-money tokens with the greater majority being EMI, C-Money Institutions.

00:12:46: On the other hand there are no authorized issuance of asset reference tokens which might not come as surprise bearing my direction behind creation Libre times, but we won't go there today.

00:13:00: What's your assessment of the current state in the stablecoin market?

00:13:05: Do you believe that the existing rules will continue to provide a solid legal foundation for the stable coin issuers or are there any friction points in the framework that might need some re-calibration also as part

00:13:24: probably face a significant review, but maybe to start with your first question.

00:13:28: First I think there is clear market interest in stablecoins and it's not only from the non-bank side that increase.

00:13:36: we obviously already had such an forge like leading the way on the bankside.

00:13:41: But now with Krivallis i think this interesting too.

00:13:43: see major European banks kind of having a consortium to launch your stablecoin The ECB also changing little bit tech and show me like some openness to your stablecoins.

00:13:55: I think all of that will also kind provide a political platform to review stablecoin requirements, an area where we definitely see changes on the reserve requirement side and that the requirement to have that thirty-sixty percent in bank deposits is to be removed or to be significantly reduced.

00:14:19: I think some of the liquidity diversification requirements were also seen as too onerous, if i recall correctly... The requirement was you cannot have more than five per cent of your reserves with a single entity which means it may end up at fourteen different providers.

00:14:37: more is than not.

00:14:38: I think rewards, from a coin-based perspective will be an interesting battleground and we'll see what happens in the U.S.. A lot of it will also focus on global stablecoins, multi issuance model... There are both political concerns about US dollar adoption Stablecoin adoption in EU markets and more technical concerns.

00:15:08: I think the technical concerns can all be met by a few enhancements, from a crypto industry perspective important that we continue to have access to those stablecoins because like the liquidity in crypto market is kind of denominated this will remain a challenging conversation, but even beyond Mika stablecoin requirements there are many other kind of stablecoin related policy issues.

00:15:44: if you think about clarity on how they can be used in tokenized funds for subscriptions redemptions.

00:15:52: If we think We also would welcome like some more clarifications under the CSDR to make sure that you maybe not only significant kind of stable coins can be used as sediment assets, but all meagre alt-raised.

00:16:09: Yeah it's a stable coin.

00:16:10: so I think stablecoins always seem have like a wide range of policy questions and challenges.

00:16:19: But given the banking industry has now also invested in this.

00:16:24: I think, these will allow for a change in policy approach.

00:16:30: You briefly mentioned rewards and i would like to go into this topic with more detail.

00:16:36: so one of the most heavily debated topics interest granting prohibition.

00:16:44: So under MECA framework, issuers are not permitted to grant interest at token holders and CASPs are likewise prohibited from granting interests of or other comparable benefits for their customers on their deposited crypto assets.

00:16:58: Again this is not a EU specific topic.

00:17:00: we also see in the UK that similar ban will be introduced and there is sort of like equivalent prohibition for the issuers in U.S under the Genius Act.

00:17:13: However, There's quite a big debate now primarily around another piece of EUS legislation The Clarity Act regulating the activities of crypto asset service providers where we see that there might be some leeway Some rules that would permit CASPs to grant some benefits for their customers on deposit crypto assets.

00:17:39: I just wanted you ask what are your views of this interest granting prohibition?

00:17:43: Is it justified from a regulatory perspective or the EU perspective, do It potentially risks undermining competitiveness, especially if we end up having a regulatory framework in the US.

00:17:57: So the home country of some of the leading crypto companies and world including yours that may provide local casps with additional maneuver space?

00:18:11: As a principal, we always say like people should be allowed to earn money on their own under money.

00:18:17: So then but also obviously recognize the debate around interests and rewards is different And you mentioned clarity acting.

00:18:26: it's interesting to see that in any way The deal was brokered on our genius act has now been re-litigated under the Declarity Act.

00:18:35: But we do expect there to be a compromise that would allow for rewards and also, you know from our conversations in Brussels or other markets I think there is openness of regulators to allow some rewards on stablecoins which is something that's really the case with many digital money products.

00:18:54: Think about credit cards.

00:18:56: they allowed points or loyalty rewards, I think this same should be allowed for stable coins.

00:19:04: I think interest is more difficult and there are these office systems from the fear that this would kind of cause like a deposit flight persuasive arguments, but they're not really founded in facts from our perspective.

00:19:27: Because for example we recently actually this week launched like a paper that kind of shows to begin with if European banks have more than two trillion already in reserves with the ECB so money that it do not end out which they get remunerated.

00:19:42: and then you look at most optimistic scenario around stablecoin adoption Think about a bit more than two percent of relocation from deposits to stablecoins over few years.

00:19:56: So I think taking that altogether, the argument and fear around negative impact on bank lending capacity is kind of overblown.

00:20:07: And having that in mind we would also... From principle-based perspective believe interest should be possible but focus on the policy side will be on rewards, which I think is a more realistic landing zone in the medium term.

00:20:25: Yeah definitely so just impractical terms.

00:20:29: we are already seeing some market participants exploring work around this prohibition for example using money-market fund structures that can function similarly to stablecoins when it comes to collateral management but with yield bearing capacity.

00:20:47: Do you believe, I mean...I'm sort of under impression that regulators might unintentionally hurting the crypto industry while allowing incumbent institutions to effectively provide a market with essentially very similar yield bearing instruments?

00:21:04: I think your totally right.

00:21:06: For their reason i also see some stablecoin issuers offering both stablecoins and tokenized money market funds.

00:21:16: yield is allowed on token as money market funds, this will be the preferred instrument for corporate treasures.

00:21:22: And if maybe you can play a bit The Devil's Advocate?

00:21:26: If we look at the underlying reserves of money markets' funds and stablecoins they are actually more prudent than strict for stablecoins to.

00:21:36: Let us now shift gears for a moment shall we... ...and look another topic that especially in twenty-twenty six seems to be gaining real traction which is tokenization or financial instruments.

00:21:46: There is currently quite a noticeable mismatch in my view between how the primary markets and secondary markets are evolving.

00:21:54: On one hand, primarations of tokenized financial instruments be suitable to facilitate the issuance in DLT form, alongside European frameworks regulating transparency and disclosure obligations like prospectus regulation.

00:22:18: Also, in many member states issuance of a variety of mostly non-equity instruments is possible including structured products that form at least the last three or four years.

00:22:28: The greatest part with the primary market issuances for tokenized financial instruments.

00:22:33: But when it comes to secondary markets things get significantly more complex.

00:22:38: As of March, we have the EU DLT pilot regime so directly applicable year regulation which effectively was intended trading in DLT financial instruments like shares, fund units and bonds through on-trading venues.

00:22:58: In terms of the scope this framework is limited so it does not cover structure products.

00:23:09: quite significant limitations in terms of instrument thresholds that basically limit also the aggregate volume or financial instruments, which can be traded on such trading venues.

00:23:21: Therefore for many industry it comes as no surprise.

00:23:25: The regime is now being revised.

00:23:32: We saw the proposal from the EU Commission, which came beginning of December last year as part.

00:23:54: This is the right move at the right time.

00:23:56: And whether these alone will be sufficient to move the needle and facilitate a long-waited creation of the secondary markets for tokenized financial instruments in the EU?

00:24:06: Great question, I always think this is also one of the most exciting areas.

00:24:12: The DLT Pire regime was like the right idea probably ahead of its time too conservative and therefore it's very hard for players now to be commercially viable.

00:24:25: but in the revised proposal, like higher thresholds have flexibility to raise further no asset class restrictions.

00:24:32: There's broad consensus for that.

00:24:34: And I think in my twenty years, in Brussels actually have never seen industry asking for something to be implemented faster than their regulators can deliver.

00:24:46: so it is clear there are a broad platform to make this work.

00:24:52: also things like many ways tokenization happens both within and outside the pilot regime.

00:24:58: we've see lots of tokenization efforts happening outside the pyrogym, because also I guess the Pyrogyma search was too restrictive.

00:25:06: And you can always say outside the Pyrogym is about re-platforming.

00:25:11: it's like incremental efficiency gains with what we have now.

00:25:14: but within that PyroGyme We can reimagine capital markets.

00:25:18: You mentioned DLT trading and settlements systems.

00:25:22: The sheer fact if you combine trading a settlement on one platform reduces both trade costs bit, forty to fifty percent.

00:25:29: So these are massive gains that can also be passed on to retail investors.

00:25:34: think of the primary issue inside.

00:25:36: you know we I think there's one player in for example where they had like a native IPO recently size enterprises, and they kind of provide new ways for them to raise capital.

00:25:51: But you also rightly mentioned that there is so much difference as in national law still when it comes to company law, insolvency, sea-law... So many ways.

00:26:00: I think the DLT Piret regime on a primary issue side needs to be complemented by something else like perhaps a twenty eight regime which seems to be fashionable.

00:26:13: And I think above all, we should probably also stop calling it a pilot regime.

00:26:21: The industry direction of travel is clear.

00:26:23: so maybe be called the permanent regime or at least think about in those lines.

00:26:30: Yeah i couldn't agree more.

00:26:33: Also In terms your company's focus another proposed amendment to the pilot regimes still pilot regimes shall permit MECA casps to participate in this framework, so basically apply for authorization to operate DLTMTF or DLTTSS.

00:26:51: What are your thoughts on the practical impact that these might have?

00:26:59: Are we now seeing a real convergence between traditional finance and

00:27:09: crypto?

00:27:11: more real and thinking many ways we are maybe already an infrastructure technology provider to existing DLT participants.

00:27:20: You can think about us offering base as a ledger for others to operate on, you could do custody of stablecoins but I think the new potential roles that have been proposed also allow an operator in time, if you choose to do so.

00:27:38: I think there might be casts which operate like a training venue under Mika.

00:27:43: that may say let's leverage our Mika license and become a DLTT SS as well.

00:27:49: So then you have everything.

00:27:51: exchanges also.

00:27:52: it works the other way around.

00:27:54: i know some of existing DLT SSes will move across and start offering no crypto on platforms, I think you will see some convergence there.

00:28:05: I think also greater is some move towards unbundling of CSD functions.

00:28:12: we obviously already have the opportunity to trading a settlement in one but like allowing for example CAS and not only banks investment firms to act as DLT.

00:28:22: notaries are welcome though i think it's still very conservative Approach that you left on.

00:28:29: the thresholds are maybe a bit too low for this to be again commercially viable.

00:28:33: So, it's something we like to improve.

00:28:36: but also from our perspective We actually want few more additional roles as well in particular On the stablecoin settlement side.

00:28:47: so one thing we're still advocating For is opportunity for CASPs To offer stablecoin cash accounts.

00:28:56: and because if you for example are a DLT, TSSF would... You don't want to maybe then rely on the bank or an investment firm like if you can do it yourself.

00:29:10: I think there's also kind of a call forward too allow forecast offer empty lending account.

00:29:16: so i think this is a lot debate around not everything pre-funded.

00:29:22: So I like the bigger players still want to keep their benefits of netting, so stablecoin lending accounts have a role too play here.

00:29:32: but these things may require changes through the CZR rather than in the DLT pirate regime and they kind of interact to some extent.

00:29:41: But it also concerns use of stablecoins as an asset both within and outside.

00:29:48: But

00:29:52: EU is not alone in this, so to say tokenized financial markets or race.

00:29:57: looking at the developments and other markets primarily in the US where the SEC has recently issued no action relief effectively enabling development of tokenized securities.

00:30:08: Do you believe that the EU still will position?

00:30:12: Or are there any remaining points improved by maybe applying lessons learned of developments in other key jurisdictions that are working on their own frameworks.

00:30:28: Great question, again this goes back to like earlier point around attitude right?

00:30:32: If I think every other week there is a speech off Paul Adkins or CTC leadership where they kind have very clear vision to bring everything of capital markets US on chain which is different from the EU approach, where we still think about it as a pilot regime.

00:30:54: So that's like a difference in terms of vision and an approach.

00:30:59: And then I think separate to that you always say decentralization is a spectrum right?

00:31:05: When we talk about DLT pilot regime obviously there are great Benefits that can come with DLT trading and settlement systems.

00:31:14: where we think as decentralization doesn't stop there, you also see a role for the use of decentralized exchanges in DeFi in capital markets.

00:31:22: So kind they are excited to also see that the SEC is considering debt and expect the SEC to come out with no action relief there.

00:31:35: And if you think about using DeFi and capital market that allows for the trading of tokenized equities without a broker so that you can have the same benefits as in crypto where For socks, you will see also is the interest of the largest asset managers now in DeFi because they all think about this as a different kind of distribution model.

00:32:03: They can have direct relationship with their clients and these are things that EU starts to slowly reflect on because it sees direction for travel in US and the ambition.

00:32:16: but I understand this would not be a DLT-pired regime review issue but more one for a method review potentially already next year.

00:32:25: Yeah, yeah definitely.

00:32:27: Definitely Roland this has been a fascinating conversation.

00:32:30: before we wrap up what is the one single thing that you would want our listeners to take away from art today's discussion?

00:32:39: Only once in that stuff I will say probably the convergence of crypto and trade-fies is not only real, but it's accelerating.

00:32:47: They will not stop with the EU deal-de-pilot regime.

00:32:51: And I think in future finance will be built on permission as a blockchain and tokenization and DeFi playing key role.

00:33:01: Thank you, Roland.

00:33:02: And with that we have come to the end of our today's episode.

00:33:06: Roland it has been a pleasure speaking about this very interesting and important topic which keeps the industry busy!