Europe before the ‘Wild West’ of crypto-assets


The region marks a milestone by regulating for the first time an industry characterized by opacity and involved in endless cases of fraud, bankruptcies and heavy investor losses

The collapse of crypto assets in 2022 and the malpractices discovered in some of its actors have reactivated the urgent need to end through regulation the dangerous cocktail of volatility, speculation and even misunderstanding that has plagued this market since the genesis surrounds. The European Commission will take a step forward in 2023 with the adoption of MiCA (Markets in Crypto Assets), a pioneering standard that will be a first-order milestone for the integration of all this financial technical framework into the conventional economic system.

Europe will be the first region, before the US or China, to encircle the ‘Wild West’, as the ECB has come to call it, that this market has become over the past year. A disorder that has caused serious losses to thousands of investors, who had entered the sector, encouraged by promises of high returns from ‘influencers’ and financial stalls, ultimately ending in unprecedented cases of fraud and even bankruptcies.

Experts agree that behind this “crypto winter” is mistrust about the real future of digital assets. And this justifies that even the companies that do business in the sector are now demanding a regulatory framework that provides legal certainty and transparency for their activities. This is an important point in achieving the goal of transforming cryptocurrencies from a mere investment into a mass payment method that can compete with cash, cards or the digital currency itself that the major central banks of the world are already preparing.

In this environment, MiCA regulations require issuers (those who create cryptocurrencies), crypto asset exchange platforms (such as FTX, Binance, Coinbase, etc.) to register and obtain a license to operate in the countries of the region. The standard leaves out, at least for now, state currencies like the digital euro, which will have central bank backing.

«MiCA is the bible of the sector. It will subject these companies, which will be required to have a physical headquarters in the EU, to a huge number of conditions and precautions so that the investor can see that there is money to protect against possible bankruptcy risks,” explains the magistrate of the National Court, Eloy Velasco.

The problem is that many of the rules have an 18-month window before they go into effect. “The industry is changing so fast that regulations are difficult to keep up with,” admits Santiago Carbó, director of financial studies at Funcas.

However, he believes that MiCA will help restore credibility to the market. In addition to licenses or registrations, the regulation also addresses the environmental concerns surrounding this type of investment, which requires massive computing power to bring new ‘cryptos’ into circulation. In this process known as “mining,” bitcoin consumes as much energy as Norway does in an entire year.

With MiCA, “companies involved in mining are obliged to report their energy consumption,” they explain from Funcas. Something that could encourage many cryptos to follow the steps ethereum has already taken, adapting the way it was created (mining) for another one that is 90% less polluting, as recalled by the magistrate of the National Court , Eloy Velasco, who has been studying the regulation in depth for some time, knowing that it will also help expose digital crimes that are now not even reported due to ignorance.

The European Commission does not want to stop there. MiCA will be included in the so-called Digital Finance Package, which also includes a ‘pilot regime’ to regulate infrastructures based on the distributed ledger network (DLT). That is, the blockchain. These decentralized systems (which do not require a supervisor to operate) have security benefits such as cryptographic protection of the user identity.

Analysts at Inversis also believe that “its technology innovation capability can deliver significant savings to companies,” he says. In a recent pilot test, technology company Calestone verified that the technology is capable of processing transactions that typically take an entire day’s work in just a few minutes. And the same applies to the cross-border liquidation operations that banks carry out on a daily basis.

This technology is being implemented in some sectors, such as energy or logistics, with excellent results. For example, Iberdrola has a pilot project to guarantee in real time via the blockchain that the energy supplied and consumed is 100% renewable with a higher degree of traceability.

The transaction is permanently recorded via the blockchain, so that all parties (nodes) can check the results. “Similarly, this technology makes it possible to work under smart contracts that self-execute when both parties abide by the agreement, eliminating middlemen and simplifying the process. This reduces costs and increases privacy,” they say from the energy company.

The Digital Finance Package will also develop the Dora Regulation, aimed at strengthening the resilience of the financial sector against potential cyber-attacks. And finally, other guidelines that already existed will be changed to prevent pyramid schemes or crypto asset investment scams “that currently coexist with very sneaky criminal attacks that don’t reach the court because we don’t know how to detect them and people don’t know them not to report,” he said. Judge Velazco.

“They are crimes against the financial system, price changes… for example, when an ‘influencer’ is speaking and causes the asset to rise or fall. That can be a criminal offense and it is not dealt with because we still do not have a specialized legal system,” he qualifies.

Velasco explains in this sense that Europe takes a lot of time “so that when such a company enters the market, already registered, the citizen who is not an expert has the guarantee of the controls established by the standard. ” Of course, those who want to live immersed in crime can continue to act from other countries outside the EU.

The advantage of these means of payment is that they are practically unforgeable. And this last point is key to avoiding digital crimes that are already happening. Only at the National Court are there currently four macro scams with crypto as an object. But thanks to the blockchain, judges can detect money laundering movements even though they are still encrypted. “We already know how to seize bitcoins, confiscate them… and it is only a matter of time before we can trace and decrypt blockchain,” Velasco confides.

Experts believe that the market will resolve these issues as regulation progresses to give credibility to the processes and safety for the user. Without going any further, the creation of national digital currencies is expected to entail a guarantee fund in the event of potential system failures or bankruptcies such as those with FTX.

But all precautions are small when the industry’s goal is for cryptocurrencies to be accepted only for their speculative appeal and become a real and mass currency.

“It’s a historic transformation, just like when we went from horse-drawn carriage to motor vehicle,” Judge Velasco explained. “What we used to pay with a piece of metal money or paper bills, we now do via Bizum, which allows money to be sent directly from mobile to mobile without knowing the recipient’s account number,” he emphasizes.

The next step, in his opinion, will be to pay with a wallet linked to a blockchain network which, he points out, will be much more secure “because it is controlled by hundreds of thousands of nodes (any point of the network where the transaction being verified)”.

Aside from security, one of the major drawbacks of these wallets is the speed of operation. According to Velasco, the average 15 minutes it takes to verify a blockchain transaction has already been reduced to a minimum. But there’s still work to be done to make it completely instantaneous.

An example of this evolution is the so-called Universal Payment Channel created by Visa and Mastercard. It is a centralized payment channel compatible with all blockchains, “stablecoins” (which seek to minimize volatility by being designed to be more easily exchanged for other types of traditional currencies) and CBDCs (as the currencies are called) digital exchange banks).

To understand it, this system would allow you to work in El Salvador and get paid in bitcoins and pay with that money in yen in China. “If Mastercard and Visa have generated this universal payment channel, I think we will have already achieved the historical goal of crypto assets: being able to pay anywhere in the world without carrying coins, bills or cards,” says Velasco.

You just need a private key in your head and an internet connection to pay. “The most important thing will be the person and that they have money, not what the resources are and in which country you have to pay. It is a revolution that has been achieved in just 12 years, although the great social masses must adopt it in a general way, ”he emphasizes.

Source: La Verdad


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