The differences between U.S. and EU approaches to crypto asset regulation are even more complicated than they appear.
Please spare a thought for the financial regulators: the American ones, with no paycheck during the government shut-down and a whopping backlog awaiting when they eventually get back to work, and the European ones, with a fragmenting union, disjointed capital markets, and a glut of new rules seeping through the labyrinthine halls of power.
Now, compare the different approaches to crypto asset regulation from each side of the Atlantic.
While the U.S. Securities and Exchange Commission (SEC) is contemplating the bigger picture and working on drawing up sector-wide rules, it is also passing judgment and handing out punitive fines. Last year saw 18 digital token-related actions from the SEC, compared to five in 2017.
The European side, however, seems to be more focused on figuring out how to contemplate the bigger picture. It’s thinking about what structure the decision-making process should take. It’s forming committees. Recommendations are flying across the departmental divides, and preparations are being made for the deliberations. It seems to be perpetually thinking about regulating digital assets rather than doing so.
For example, earlier this month, you may have noticed more calls for EU-wide crypto rules, this time from the European Banking Authority and the European Securities and Markets Authority (ESMA).
This may, on the surface, seem like the cultural differences that film lovers are already familiar with: the fast, action-heavy approach of the U.S. blockbusters vs. the thoughtful and careful style of the European indies.
But it’s more than that. The differences are embedded in legal structures and traditions and highlight the difficulty of agreeing on how the new class of crypto assets should be regulated.
Deep roots
European law is based on the Napoleonic code, or “civil law,” in which everything is regulated by pre-established law or administrative decisions. Codified statutes predominate, and regulation is often even more comprehensive than it needs to be, which also makes it less agile. Its aim, however, is to produce a uniform set of rules to cover all eventualities and to foster harmonious coordination.
The U.S. runs on a “common law” system, in which judges have a more significant role in decision-making, and rules are made on a case-by-case basis, often (but not always) based on previous rulings.
Another big difference is that the European Union has sovereign nation-states to answer to. Many of the decisions taken by the EU have to be ratified by the actual countries, which gives them a lot more scope to undermine Europe-wide initiatives, depending on their national interest. Getting things done on a top-down, regional basis is very difficult.
What’s more, in Europe, securities law is still, on the whole, national. The push towards capital markets union is moving slowly, despite being one of the priorities of the current mandate. Only three of the 13 foundational legislative texts presented by the commission since 2014 have been adopted.
And time is running out: the current mandate ends in May, and the urgency fuelled by increasing concern over Brexit and the possibility of another financial crisis does not seem to have accelerated the pace of progress.
In the U.S., the relationship between the states and the federal agencies is more uncomplicated. A long history of enforcement of the application of federal laws by the Supreme Court has brought a veil of interoperability to the patchwork of state regulation.
Different speeds
So, understandable frustrations over the lack of clarity on the part of the U.S. regulators and their slow, case-by-case approach should be tempered with an appreciation that at least they are not as cumbersome as their European counterparts. That, combined with the sheer size of the U.S. capital markets, means that all eyes are on what steps the SEC will take regarding crypto assets.
Yet that’s not to say that the European Union is not taking crypto assets seriously. The report released by ESMA last week revealed the results of a months-long survey of member states’ regulators to identify standard definitions and parameters for digital tokens. It also highlighted gaps in current regulations and suggested measures to close them. However, the regional securities body recognized that many potential solutions were beyond its remit, implying that actual agreed-upon criteria were still far off.
Meanwhile, we are likely to see individual countries in Europe take tentative steps toward allowing crypto-asset issuance on regulated exchanges. Yet the reduced size of the local markets and the fragmented rules governing exchanges and custody are likely to constrain tokens issued in Europe, especially since network effects – which rely on a broad market – are a fundamental part of token valuations.
In the U.S., on the other hand, 2019 is likely to bring a flurry of actions and statements from the SEC. Unregistered securities offerings are punished, listing proposals are examined, and clarity is given regarding future expectations. While this may influence other securities regulators worldwide and edge the sector towards a more comprehensive framework, regional differences, and national considerations make that probably wishful thinking.
Yet even disappointing progress is better than none. The structural obstacles that hinder the good intentions of sprawling economic blocs, and the reduced size of more agile and “crypto-friendly” jurisdictions, will consolidate the U.S. role as one of the more secure and liquid markets for digital tokens. And its regulators will get the chance to set a precedent for crypto asset regulation in the future.
Let’s hope they can get back to work soon.
