CryptoReflexions#4 - the role of the regulator

“The role of the regulator must be to facilitate exchanges among all actors, to foster dialogue, to mobilize and make the whole of society accountable, and to speak on its behalf. The regulator, whatever it may be, will thus lay the foundations of what could be a participatory conception of regulation (…). In other words, the regulator must be society’s instrument to counterbalance the power of the strongest.”

This passage is taken from the book by Serge Abiteboul & Jean Cattan, “Nous sommes les reseaux sociaux” (We Are Social Networks).

While this reasoning was developed for the regulation of social networks, it is, in my view, transferable to all regulated sectors and even more so in digital sectors where innovation is always faster than regulation.

The crypto-asset sector is no exception. I must specify from the outset that while certain scandals tarnish the reputation of the crypto ecosystem, one should not throw the baby out with the bathwater.

It is moreover excessive to consider the sector as a true wild west, as I have already written and said on several occasions. As Ray Dalio wrote, sensational articles and gossip attract more readers and viewers than austere objectivity.

In this regard, it was indeed banknotes that were found at Eva Kaili’s home and not crypto-assets, despite being so often pointed to as a means used by criminal organizations. In a 2022 report, Europol confirms that the amounts of crypto-assets used for fraud are comparatively smaller than the amount of illicit funds involved in traditional finance.

Finally, regulated sectors also have their little scandals. Credit Suisse, Silicon Valley Bank, Silvergate, or even Lehman Brothers & Fortis are names that will make some shiver. Let us therefore be fair and objective in comparisons because, as you know, comparison is not reason.

If we agree that regulation is indeed society’s instrument for counterbalancing the power of the strongest, then regulators are there, first and foremost, to protect consumers, limit market abuse, supervise or control certain activities. In Belgium, the Financial Services and Markets Authority (FSMA) ensures the honest and fair treatment of financial consumers and the integrity of financial markets.

One should then reflect on how to carry out this mission.

On this subject, we can establish an execution spectrum ranging from an internal (or individual) approach to an external (or collective) approach.

The internal approach is one where regulations are conceived, enacted, and drafted solely by the market authority. No public consultation, no expert hearings or working meetings. Work done in a silo and “disconnected” from the market. I am not fond of this, as you may suspect.

Conversely, the external approach resembles what S. Abiteboul and J. Cattan describe. It is obviously not about giving full power to the market. However, public consultations are solicited to foster dialogue and reflection to enable the authority to enact informed regulation, in light of these reflections.

This way of working is close to the concept of collective intelligence, which holds that a team of cooperating agents can solve problems more effectively than when these agents work in isolation. Nothing new under the sun: two heads are better than one.

Moreover, the external approach makes sense democratically speaking. Indeed, the regulation implemented in certain sectors is regularly an intrusion into the fundamental rights of individuals. The procedures put in place to combat money laundering, notably, have already been struck down before the CJEU (see here on this subject).

One can also question the democratic legitimacy of certain rules. Laws and decrees are voted on by parliamentary assemblies, composed of members elected by citizens at elections. This legislative process allows rules to be developed through an external approach, notably through the work of parliamentarians or the publication of parliamentary proceedings where anyone could consult what was said about this or that law under discussion.

Why is it different for regulations in certain sectors? Who is in power? Who is at the helm in an internal approach? Nobody, or at the very least the average citizen, really knows.

With an external approach to regulatory development, a bit of democracy is instilled in the rule-making process, which is not something our societies would find displeasing.

Of course, these two approaches are rarely implemented as such. There is a cursor placed between the two extremes.

In terms of crypto-assets, the French and British regulators have placed the cursor in favor of the external approach. Public consultations are numerous and dialogue is permanent. As a result, companies and startups favor these countries to establish and/or develop their activities because they see that dialogue and the external approach are advocated.

Belgium is also trying the external approach. I commend the initiative of the public consultation on “Qualification of crypto-assets as securities, investment instruments or financial instruments” which resulted in an interesting communication from our market authority. However, the development of the VASP regime or the advertising regulation for crypto-assets was implemented through a rather internal approach. This is unfortunate, although we can understand some of the reasons that led the authority to act this way.

Furthermore, the advantage of using a working method based on the external approach is that the participation of controlled actors will “nourish” the regulator and ultimately leads to greater compliance with the rules enacted.

Through dialogue, a virtuous exchange is created and contributes to the education of each stakeholder. The market can better understand the regulator’s intentions and propose solutions. Conversely, the regulator can draw on “field” practice to enact a more appropriate regulatory framework. The rules are co-constructed, which creates stronger adherence to them.

Conversely, in an internal approach, rules are imposed on actors who feel “attacked” and/or caught off guard in bringing their activities into compliance. These rules are perceived as a means to “break” activities and/or companies when in reality, that is not the case. The absence of dialogue and consultation does not allow, upstream, the identification of the disproportionate nature of a rule. This leads to an ineffective process where the rule is enacted then modified because it is unsuitable.

Finally, in the crypto-asset sector where expertise is scarce given how recent and evolving the subject matter is, some regulators are overwhelmed with work and do not always manage to absorb the flow within a reasonable timeframe. The external approach then allows third parties to contribute to the work to be done. In this period of work overload, this advantage is not negligible in my opinion and helps avoid wasting everyone’s time.

With the vote on the MiCA regulation by the European Parliament last April, national authorities will have to get to work to apply this regulation, which will come into force in 2024 for certain parts.

Let us hope that the national authority designated in Belgium to implement MiCA adopts a resolutely external approach. Belgium counts among its ranks innovative companies and is full of talent ready to contribute. Let’s take advantage of this energy and build the world of tomorrow together.

To go further: cryptomonnaie.be — The Belgian cryptocurrency blog | Newsletter CryptoBelgique — Stay informed of news and updates