2.3.2. MiCA does not support “Coasian” (market) innovation
-94. The list of MiCA’s internal contradictions does not, alas, end here. One of the most fascinating financial innovations happened mostly between 2014 and 2018 and was called “Initial Coin Offerings” (ICO). Ethereum, the second most important blockchain and crypto-asset, has been launched in 2014 through a “coin offering” on the Bitcoin blockchain. As its technology was better suited, most ICOs then moved to the Ethereum blockchain. ICOs were time-limited offers which allowed teams of people to raise funds “with little more than a […] ‘prospectus’” and a web site.
-95. Although the press was presenting the phenomenon as “raising money”, in reality the projects were soliciting contributions in crypto-assets. The pool of potential investors was thus naturally restricted to contributors with enough knowledge to at least own crypto-assets at a time when few people were in possession of crypto-assets, and it is hard to argue that those who did were unaware of the risks. And as the teams issuing crypto-assets through ICOs had little resources, there was arguably little imbalance in power or information between often scrappy “borrowers” (issuers of new crypto-assets) and “lenders” (owners of existing crypto-assets choosing to subscribe to the issuance of a new crypto-asset).
-96. ICOs embodied “permissionless innovation” in which “the customer” (people owning crypto-assets) had the agency of taking the risk or not, with little more protection than the software code and rules embedded in an auditable “smart contract” that was holding the contributed crypto-assets for the duration of the offer. ICOs created an almost frictionless market for investments and represent a major “Coasian” innovation made possible by blockchain technologies and crypto-assets. As most of the crypto-assets in circulation attracted capital through ICOs, it can be said that between one third and half of today’s cryptoverse owes its very existence to this financial innovation.
-97. As mentioned above, the “third party” having custody of the crypto-assets contributed during the duration of the ICO was a “smart contract” – an immutable program deployed on the public blockchain, rather than a legal entity playing the role of an authorized “crypto-asset service provider”. I will remind here Satoshi’s words quoted in the Introduction, par. 5: “the main benefits are lost if a trusted third party is still required”. Yet MiCA’s Recital (36) explicitly mandates the reintroduction of an intermediary: “[…] The offeror should ensure that the funds or other crypto-assets collected during the offer to the public are safeguarded by a third party.” Article 10(3) explicitly prohibits the blockchain innovation, by mandating that the “Offerors of crypto-assets […] shall have effective arrangements in place to monitor and safeguard the funds or other crypto-assets raised during the offer to the public. For that purpose, those offerors shall ensure that the funds or crypto-assets collected during the offer to the public are kept in custody by one or both of the following:
- (a) a credit institution, where funds are raised during the offer to the public;
- (b) a crypto-asset service provider providing custody and administration of crypto-assets on behalf of clients.”
-98. Billions of dollars of capital have flown in 2017 and 2018 in blockchain innovation through contributions to such fabled ICOs as Tezos (which raised Bitcoin and Ether valued at more than 2 bln. USD at the time the offer closed) and EOS (which raised more than 6 bln. USD in Bitcoin and Ether at the closing date value). True, many teams running an ICO proved over-optimistic about their prospects. Yet if anything embodies the current era of rapid technological innovation, it is Facebook, (now Meta), a company which started in 2004 and, with more than 2 billion users worldwide now, it “conquered the world” under the motto “Move fast and break things”.
-99. Many “crypto-asset issuers” launching ICOs tried to emulate Facebook and failed, leaving contributors nursing losses. However, as the French proverb says “plaie d’argent n’est pas mortelle” (“financial wounds are not lethal”) and, despite media’s appetite for reporting crypto-related scandals, there have been relatively few fraudulent ICOs (5-25% as of 2019) and none of significant size. Although a few court cases were filed in Switzerland (e.g. Tezos and Envion), no notable lawsuits were brought in relationship with ICOs before the EU courts, to the best of my knowledge, so it can hardly be argued that the number of legal disputes required legislative action.
-100. And yet such offers will from now on be seriously hindered, not least by Art. 13 which introduces a “right of withdrawal” stipulating that “Retail holders shall have a period of 14 calendar days within which to withdraw from their agreement to purchase crypto-assets other than asset-referenced tokens and e-money tokens without incurring any fees or costs and without being required to give reasons […] 2. All payments received from a retail holder including, if applicable, any charges, shall be reimbursed without undue delay and in any event no later than 14 days from the date on which the offeror or a crypto-asset service provider placing crypto-assets on behalf of that offeror is informed of the retail holder’s decision to withdraw from the agreement to purchase those crypto-assets. […].”
-101. That might seem nothing special, and just the application of the same rules as in the fiat-based, traditional finance (which was probably the intent). The inherent contradiction only appears on second thought: either the crypto-asset world innovates and redefines financial interactions, or they are just traditional finance by another name. If the former, coaxing them in the straitjacket of traditional finance will stifle innovation. If the latter, why legislate at all? To those with knowledge of blockchains, such a rule sounds a strident alarm bell.
-102. Indeed, in exchange for providing aspiring innovators of little or no means with “custody services” and "secure systems" (see below), the blockchain often compensates the “miners” / “validators” through transaction fees, which are proportional to the “total addressable market” of a blockchain. Thus, in exchange for allowing innovators access to the relatively vast numbers using the popular Ethereum blockchain, the transaction fees validators command for this blockchain are particularly high. In this instance, what Art.13 implies is that the issuers of crypto-assets will need to incur the costs of the two transactions (subscription and withdrawal) to make indecisive customers full, a clear deterrent for innovators. On the Ethereum blockchain, people with deep technical knowledge of blockchain mechanics can, and are all but guaranteed to exploit this provision using MEV (“Miner Extractable Value”) to “legally” (in the “code is law” sense) siphon the funds contributed to a project for the benefit of validators.
-103. Further, Art. 13(1) of the same title adds: “Offerors and persons seeking admission to trading of crypto-assets […] shall: […]
- d) maintain all of their systems and security access protocols to appropriate Union standards”, standards which are going to be defined by ESMA, in cooperation with EBA, within 18 months after the date of entry into force of the Regulation. Yet more than half of today’s crypto-verse has been started by project teams who had, at the time of the ICO, no money and no systems to speak of. As explained earlier, the only “system and security access protocol” they used was the blockchain itself, which they did not control. Ethereum branded itself “the world’s computer”, and that was an integral part of the real innovation. It remains to be seen how ESMA is going to translate this into implementation requirements, but there are few reasons for optimism.
-104. If MiCA’s prescriptions for ARTs (Title III) remain moot, as there is currently no ART of noticeable size in MiCA’s scope, and none has been announced, its Title IV, dedicated to EMT amounts to effectively banning stablecoins in the EU. One interesting aspect, concerning both ARTs and EMTs is the prohibition of interest. Recital (58) explains that the aim is to ensure that these tokens are not used as “store of value”, which rises several questions. Indeed, it has been argued that Bitcoin, the archetypal crypto-asset, while an imperfect “medium of exchange”, can provide a good “store of value”. Despite high short-term volatility, its value has kept increasing over sufficiently long periods of time. Why is the EU giving the impression that it fears Bitcoin’s and crypto-assets’ competition while the US, who has arguably more at stake, seems to do so to a significantly lower extent, or not at all?
-105. It is therefore to be feared that few issuers will be able and willing to comply with the obligations in order to obtain an EU authorization. That in turn means that EU CASPs operating a trading platform won’t be allowed to list them, a heavy locational disadvantage for such platforms. Two likely outcomes are that crypto-asset trading platforms will dwindle in Europe and that EU consumers will be driven “towards non-EU regulated foreign exchanges, thereby largely thwarting the EU’s goal of better consumer protection.”
-106. Thus, the MiCA provisions discussed above seem bent on preventing or seriously hampering not only the more ambitious, “Northern” innovation, but also the frugal, “Coasian”, permissionless blockchain innovation from happening in Europe. They confirm what Michael Taylor’s social research had uncovered as soon as 1986, namely that “states create or aggravate problems of the kind they are supposed to solve and undermine conditions for alternatives to the state to be workable.”
| Table of Contents | |
|---|---|
| <previous> | <next> |
[148] I. Kaminska, “Building blockchain banks with ICOs”, Financial Times, 2017
[149] N. Szabo, “Smart Contracts”, 1994, accessible at https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart.contracts.html
[150] S. Nakamoto “Bitcoin: A peer-to-peer Electronic Cash System”, op. cit.
[151] C. Catalini, J. Gans, “Initial Coin Offerings and the Value of Crypto Tokens”, Rotman School of Management Working Paper No. 3137213, 2019,
[152] J. Piet, J. Fairoze, N. Weaver, “Extracting Godl [sic] from the Salt Mines: Ethereum Miners Extracting Value”, 2022
[153] C. Noyes, “MEV and me”, Paradigm research 2021
[154] P. Hansen, “New Crypto Rules in the European Union”, op. cit.
[155] ibid.
[156] M. Taylor, “The Possibility of Cooperation”, op. cit.