The market’s interest in crypto-assets is not new. In February 2014, the Luxembourg Financial Sector Supervisory Commission (CSSF) issued a press release announcing that the activities of virtual currency providers fell under the scope of financial services rules. This was a breakthrough for the Luxembourg financial sector, which moreover helped attract well-known players such as Bitstamp and Bitflyer.
However, “the wind has perhaps died down a little since then”, observed Thomas Campione, director and crypto-assets leader at PwC Luxembourg. “We might have expected things to accelerate more decisively from 2016-2017 onwards, but that has not been the case.” Virtual currency providers have in the meantime been regulated as payment service providers, but only for fiat currency-related activities and not those related to cryptocurrencies. It is clear that several players have shown an interest in France and Germany by establishing themselves there.
With a specific text for the crypto-implementation industry several years ago, we might have been able to attract more players and build a larger ecosystem than the one we have now, like Switzerland, France and Germany.
Was it necessary, like France, for Luxembourg to adopt a new specific text to anchor its competitive advantage? “The Mica regulation tends to show that a specific text was necessary”, commented Campione. “With a specific text for the crypto-implementation industry several years ago, we might have been able to attract more players and build a larger ecosystem than the one we have now, like Switzerland, France and Germany. However, we cannot rewrite history and must look forward to the opportunities for Luxembourg.”
A question of perception
The expected entry into force of Mica in the course of 2023 will therefore provide a common basis for all 27 member states. As this is a European regulation and not a directive, no country will be able to try to create a competitive area with a transposition of the text. However, Campione said that he does not expect this common regulatory basis to reset the clock. “We will catch up from a regulatory point of view by simply applying Mica. But from a perception point of view, there will still be some way to go to capture the industry’s attention.” He highlighted the need for a sufficiently large and mature ecosystem to attract international industry players.
Yet, the regulatory framework and ecosystem are not enough to make Luxembourg a ‘preferred place’ for the crypto-asset industry. In addition to the regulator’s speed in granting licenses, Campione pointed to the government’s role in taking a position on the country’s strategy in this area, following the example of Bruno Lemaire, French minister of economy and finance. On 17 October, Lemaire presented Paris’s roadmap on crypto-currencies, wanting “France to be the European hub of the crypto-asset ecosystem”.
There is an opportunity for Luxembourg to attract institutional players that have the will and the backbone to do things properly.
For his part, Campione welcomed the French approach. “Bruno Lemaire’s words are quite proactive. He’s reaching out to the industry by setting expectations as well. That is a dimension on which we could certainly make progress.” This is not to say that he believes that Luxembourg’s position should be to accept all entities that would like to establish themselves there. “There is an opportunity for Luxembourg to attract institutional players that have the will and the backbone to do things properly. Mica will create a natural selection. Either the bar will be too high for some, or others will not have sufficient skills. They will simply be eliminated from the market.” In his view, Luxembourg thus has a key role to play in attracting the best people in the market.
Rising costs
The requirements brought by the Mica regulation will indeed be high, intended to cover all crypto-assets that are not considered financial instruments. As a result, all types of stablecoins--asset reference tokens (ARTs) that have a basket of assets as their underlying asset, consisting of traditional currencies or commodities, and e-money tokens (EMTs) backed by a single traditional currency--will be subject to the Mica regulation. “One of the priorities of Mica is to regulate assets that could, in some way, have an impact on European monetary policy. If a significant volume of people start using stablecoins issued by private entities and/or backed by foreign currencies, this could also lead to a risk of state sovereignty,” said Campione. In addition, the Mica regulation will also cover utility tokens, which are crypto-assets used within a closed ecosystem such as a specific platform.
Therefore, the EU has the ambition to profile Mica as the corollary of the Markets in Financial Instruments Directive (Mifid) for assets that are not financial instruments. However, Campione expects Mica to cause some potential damage among market participants. “At the time Mifid arrived, the traditional financial sector was largely more institutionalised than the crypto-asset industry is today. The compliance efforts or the risk of market players disappearing are certainly more important than when Mifid arrived.”
This will be all the more important as there is a risk of loss of assets at the level of exchange platforms. Securing the life cycle of private keys and the segregation of client assets are critical elements
Despite this, Mica’s mission remains to raise the level of governance of the crypto-asset industry, particularly in terms of the expertise and skills required in both the management and control and risk management teams within the players. “This will be all the more important as there is a risk of loss of assets at the level of exchange platforms. Securing the life cycle of private keys and the segregation of client assets are critical elements,” said Campione. Financial costs and a strengthening of human resources will be accompanied by prudential capital requirements that did not exist in the past. This should prevent a scandal like FTX in a European jurisdiction in the future.
Originally published in French by and translated for Delano