As a crypto venture advisor and former blockchain leader at Bitkom, Patrick Hansen is in high demand for his expertise in the field of crypto regulation. In a conversation with CVJ.CH, he comments on the problems that are piling up due to recent regulatory developments.
With the ups and downs of the crypto sector, calls to subject cryptocurrencies and DeFi to stricter regulation are piling up. Following the recent collapse of the Terra ecosystem, these voices grew louder in both America and the EU. New legislation would particularly affect stablecoins, cryptocurrencies in general, the metaverse, as well as NFTs and DeFi companies.
CVJ.CH: How do you see the current status of crypto regulation and where are we headed?
Patrick Hansen: All major jurisdictions in the world by now have specific plans for comprehensive crypto regulations. And as is often the case, the EU is first in setting the standards. In the next few months, the landmark MiCA regulation will enter into force and apply to most companies from 2024 onwards. In the US, the Lummis Gillibrand crypto bill is a first attempt at creating a comprehensive, regularly package for the space. A few years from now, I expect crypto to be regulated all around the world, and I expect crypto to become an key focus area for many governments.
The focus of most regulators seems to lie on stablecoins. Why is that and which concerns do stablecoin issuers have to tackle first?
There are several reasons for that. One is that many politicians and regulators see greater chances of success and mass-scale adoption for stablecoins vs. crypto-assets like bitcoin. Therefore, stablecoins are often seen as having higher financial stability and monetary substitution risks, at least right now. Regulators are, understandably so, unwilling to let a fiat-based financial system based on stablecoin rails grow to systemic importance without their supervision. Apart from that, I think that stablecoins are closer to traditional regulated financial services like the issuance of e-money, which, at least to some extent, makes it easier to set up regulatory requirements versus entirely new phenomena like Bitcoin or Ethereum.
Do you have any thoughts about the recent developments of the digital euro?
To be honest, it is still not entirely clear to me what exactly the ECB’s goal is for a central bank-issued digital euro. Whether it is supposed to become a kind of digital cash or rather a new digital payments option. That's why at this stage, I can’t really evaluate the project and progress of it. If the ECB was to issue a cash-like, anonymous digital bearer asset, I would probably support it. The other options don’t look very convincing to me at this stage. Fundamentally, I believe that private companies, led and overseen by regulators, are better suited to bring innovation to our current financial system than the central bank. The central banks competitive advantages are resilience and trust, whereas the private sector is good at meeting consumer demands and delivering financial innovation.
Where does the EU stand with regards to crypto regulation compared to the US and Asia?
The EU is, for better or worse, the clear global leader in terms of crypto regulation. It has a comprehensive set of rules for issuers and service providers (exchanges, custodians etc.) that are about to enter into force. It might take years for the US to get to this point. I am not an expert in how most Asian countries are approaching crypto, but my understanding is that countries like Singapur or South Korea have more specificically tailored regulatory initiatives around token offerings for example instead of a comprehensive, overall framework that spans from rules for crypto exchanges to those for stablecoin issuers.
Could you explain the Travel Rule and what it means for the crypto space?
This is quite a complex topic and I invite everyone to have a look at a longer thread I wrote on the FATF travel rule a few months ago. In essence the travel rule extends AML and CFT (counter-financing of terrorism) obligations to cryptocurrency transfers valued at $1000 or more and applies to Virtual Asset Service Providers (VASPs) such as cryptocurrency exchanges. It requires the relevant financial institutions to pass on certain customer and transaction information to the next financial institution.
For crypto, that means that exchanges, custodians etc. have to exchange customer information when these customers transact crypto with one another. This introduces a wide range of technical (how to exchange this data), data protection, and operational challenges to these market participants. Companies like Coinbase and others have already introduced new messaging platforms like TRUST to comply with the new requirements. Since the travel rule is mandatory, I expect this development to accelerate. In all likelihood, 12-24 months from now, almost every country will have implemented the travel rule in some shape or form.
How does this play together with the Markets in Crypto Assets (MiCA) framework of the EU?
MiCA only briefly touches on AML rules for CASPs. The TFR (transfer of funds regulation) is the regulation that will implement the FATF travel rule on the EU level. Together, MiCA & TFR will be the most important regulatory frameworks to follow for crypto companies in the EU.
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Would you describe strict regulation of crypto applications as a necessary evil or is it hindering adoption of blockchain technology?
Regulation can create legal certainty, trust, and adoption, especially from more institutional players, but on the other hand it can also create high barriers to market entry and stifle innovation if implemented badly. So what matters are the specific regulatory initiatives. The right balance has to be struck. Overall, I think that global regulatory initiatives are largely a net positive for the crypto space, since they will create the legal certainty necessary for institutions to engage in the space and set the standards that will hopefully prevent some of the worst episodes of fraud and scams we have all been witnessing. I don’t see a way crypto could reach a critical mass adoption without there being clear regulatory rules and oversight. However, as mentioned, the details of these rules are what matter.
What do you expect the regulatory framework to look like in 3-5 years?
As mentioned, I believe that 3-5 years from now, there will be clear regulatory framework for crypto companies and investors all around the world, be it from a investor protection, AML, or financial stability perspective. As often with maturing industries, I believe regulation and compliance will become a competitive edge for most of the larger, existing companies, as they have the resources necessary to navigate this increasingly complex regulatory landscape.
I expect the market, no matter the specific crypto niche (stablecoins, custodians etc.), to consolidate even further. On a global scale, I believe a lot of effort will be put in by institutions like the G20 and others to harmonize the regulatory approaches and push back against regulatory arbitrage. Increasingly, the focus will shift towards global coordination and enforcement. Without doubt, crypto regulation will play a huge role in the decade to come and I wouldn’t be surprised to see the topic discussed by heads of states at the highest levels of government.
Patrick Hansen serves as crypto venture advisor at Presight Capital, a global venture fund with +$600m AUM and 50+ startups in its portfolio. Prior to that he worked as head of strategy & business development at crypto-wallet startup Unstoppable Finance and head of blockchain at Bitkom, Europe’s largest tech association, where he led crypto-related regulatory work, research, and partnerships. Patrick holds master degrees in business and political science.