The role of the regulator

This article is also published in French and is available at the following link.

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“The role of the regulator must be to promote exchanges between all players, to encourage dialogue, to mobilize and empower society as a whole and to speak on its behalf. The regulator, whoever they are, will thus lay the foundations of what could be a participatory conception of regulation (...). Regulation then becomes a place of dialogue between government services, justice, researchers from all disciplines, associations and Internet users. In other words, the regulator must be the instrument of society to counterbalance the power of the strongest”. “

This passage is (a liberal translation of) an extract of the book of Serge Abiteboul & Jean Cattan, “Nous sommes les réseaux sociaux” (“We are the social networks”). I fully subscribe to this vision, which is very correct for several reasons that I will explain below.

If this reasoning was made for the regulation of social networks, it is transposable, in my opinion, to all regulated sectors and all the more so in the digital sectors where innovation is always faster than regulation.

The crypto-asset sector is no exception either. I must point out from the onset that if certain scandals come to tarnish the reputation of the crypto eco-system, we must not, however, throw the baby out with the bathwater.

Europe has positioned itself as a forerunner with the MICA regulation and the vast majority of players work in full compliance with the legislation, despite what some may say.

It is also wrong to consider that the sector is a wild west as I have already written and said on several occasions. As Ray Dalio said, loud articles and gossip draw more readers and viewers than stark objectivity.

In this regard, it is indeed banknotes that were discovered at Eva Kaili’s and not crypto-assets, yet so pointed out as a means used by criminal organizations. We should also remember that Europol, in a 2022 report, confirms that the amounts of crypto-assets used for fraud are comparatively lower than the amount of illicit funds involved in traditional finance.

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

This being written, we must agree on the fact that regulation is indeed the instrument of society to counterbalance the power of the strongest. Regulators are there, above all, to protect consumers, limit market abuse, supervise or control certain activities.

In Belgium, the Financial Services and Markets Authority (FSMA) monitors the honest and fair treatment of financial consumers and the integrity of financial markets.

According to (our translation of) the FSMA website, this authority “aims to ensure that the financial consumer is treated correctly and fairly. It works for the fair and orderly functioning of the financial markets and for the transparency of these markets, by ensuring the dissemination of correct and complete information by the companies that use it. It promotes the adequate provision of financial services by supervising compliance by financial institutions with the rules of conduct applicable to them, by controlling financial products, the providers of these services and supplementary pensions, and by contributing to better education of the financial consumer. The FSMA thus wants to ensure that the financial system deserves the trust of its users.”

Once we are in agreement with the role of the regulator, we need to think about how to carry out its mission.

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

The internal approach is one where the regulations are considered, enacted and drafted solely by the market authority. No public consultation, no expert heard or working meeting. Working in isolation and “disconnected” from the market. I'm not fond of it, you can imagine.

Conversely, the external approach is similar to what S. Abiteboul and J. Cattan describe. It is obviously not a question of giving full powers to the market. Nevertheless, public consultations are requested to promote dialogue and reflection to enable the authority to enact enlightened regulations, in the light of these reflections.

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

Moreover, the external approach makes sense, democratically speaking. Indeed, the regulations implemented in certain sectors regularly interfere with the fundamental rights of individuals. The procedures put in place to combat money laundering in particular have already been challenged before the CJEU (see here on this topic).

We can also ask ourselves the question of the democratic legitimacy of certain rules. Laws and decrees are voted by parliamentary assemblies, composed of members elected by the citizens at the time of the elections. This legislative process makes it possible to draw up the rules according to an external approach, in particular through the work of parliamentarians or the publication of parliamentary works where everyone could go and consult what is said on such and such laws under discussion.

Why is it different for regulations in certain sectors? Who is in power? Who is at the helm in an internal approach? No one, or at least not the average citizen, really knows.

With an external approach in the development of regulations, we instill a little democracy in the development of the rule which is not likely to displease our societies.

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

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

Belgium is also trying the external approach. I welcome the public consultation initiative on “Qualification of crypto-assets as transferable 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 crypto-asset advertising regulation has been implemented in a rather internal approach. It's a shame, although we can understand some of the reasons that led the authorities to act in this way.

Then, the advantage of using a working method based on the external approach is that the participation of the controlled actors will “feed” the regulator and ultimately implies greater compliance with the rules laid down.

Indeed, thanks to the dialogue between the players and the market authority, a real exchange is created. These exchanges are virtuous and necessarily contribute to the education of each of the stakeholders. The market can better understand the intentions of the regulator and propose solutions to achieve these objectives. In the other direction, the regulator will be able to draw on “field” practice to enact a more appropriate regulatory framework. The rules will also be more proportionate because dialogue with the market will regularly lead to compromises between the regulator's proposals and those of the market.

The rules are co-constructed which creates a stronger adhesion.

Conversely, in an internal approach, the rules are imposed on the actors who therefore feel “attacked” and/or caught off guard to bring their activities into compliance. These rules are perceived as a means of “breaking up” activities and/or businesses when, in essence, this is not the case. Some rules could also be disproportionate to the reality of the market or the objectives to be achieved, as the CJEU has already found in certain cases. This disproportion of the rules is often the grievance that is reproached to the regulator working in “internal approach”. The absence of dialogue and consultation does not make it possible, upstream, to identify the disproportionate nature of a rule. We then fall into an ineffective process where the rule is enacted and then modified because it is unsuitable.

Finally, in the crypto-asset sector where expertise is scarce as the field is recent and evolving, some regulators are overwhelmed with work and do not always manage to absorb the flow within a reasonable time. It is therefore necessary to achieve optimal efficiency in the process of reflection so as not to have to undo and/or redo what has been done.

The external approach then makes it possible to have third parties contribute to the work. In this period of work overload, this advantage is not negligible in my opinion and makes it possible to avoid wasting time for everyone.

With the vote of the MICA regulation by the European Parliament last April, the national authorities will have to get to work to apply this regulation which will come into force in part in 2024.

Let’s trust that the national authority that will be designated in Belgium to implement MICA will adopt a resolutely external approach. Belgium is home to innovative companies and is full of talent ready to contribute. Let's take advantage of this energy and build together the world of tomorrow.

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Author: Florian Ernotte, founder of avroytech.