The “crypto-asset” landscape: a path for a global standard.

Abstract.

The plenary debate in the European Parliament on cryptocurrencies scheduled for next Thursday, Jan. 23 (FINAL DRAFT AGENDA - Sittings of 20/01/2025 - 23/01/2025), involving crucial issues such as investor protection, combating financial crime, and EU competitiveness, seems to reflect the intent to strengthen regulation and transparency in a sector that has gained increasing global importance. The goal is to ensure a high level of security for those participating in the cryptocurrency market. It is assumed that measures will be discussed to mitigate the risks associated with scams, volatility, and fraudulent practices. Speculation about the funding of Donald Trump's election by the cryptocurrency industry has turned the spotlight on the political and economic impact of this market. This perception could prompt the EU to move decisively to avoid possible risks of political interference and market distortions.

Introduction.

Fabio Panetta, Governor of the Bank of Italy, expressed a very critical viewpoint on cryptocurrencies during his latest speech at the annual meeting of the Italian Banking Association (ABI). His statements highlighted a series of controversial and problematic aspects related to the world of cryptocurrencies. Panetta's thoughts, to date, reflect the position of the Bank of Italy on crypto-assets; therefore, the purchase of 11 Bitcoin by Intesa Sanpaolo, the main Italian bank, raises even more uproar and interest at the same time.

"Cryptocurrencies have no intrinsic value" and "do not generate income streams like coupons or dividends." "They are created through computer entries and there is no entity or real or financial activity that ensures their value." And again. "They are sometimes traded on informal and opaque circuits, on platforms not subject to adequate controls." Those who hold them have the primary objective of reselling them at higher prices, and in some cases, to evade tax regulations, anti-money laundering laws, and financing of terrorism. "In general, these crypto assets (those that are not backed) essentially represent a high-risk speculative bet whose value is detached from fundamentals." For these reasons, their value experiences extreme fluctuations. As is evident, they do not have the characteristics to perform the three functions of money: payment, store of value, and unit of account."

In this regard, the regulation on Crypto-Asset Markets (MiCA), in force since last December 30, represents an ambitious regulatory framework of the European Union to regulate the crypto-assets market. MiCA introduces three main categories of tokens that meet the requirements to be used in payments, starting from June 30, 2024, when the first part of the Regulation came into force, namely:

1. Asset-Reference Token (ART). These tokens are linked to the value of multiple fiat currencies, commodities, or a combination of both, making them more stable and usable as a means of payment.

2. Electronic Money Token (EMT). These tokens are directly linked to the value of a single fiat currency, such as the euro or the dollar, and are designed to function as a form of electronic money.

3. Crypto-assets c.d. "other than", residual category that includes crypto-assets other than EMT and ART.

The a-territorial nature of "crypto-assets" represents a unique challenge for regulators. These are not limited by geographical boundaries and operate on a decentralized global network, making it difficult to apply traditional regulations based on national borders. This has led to the phenomenon known as "jurisdictions shopping," where crypto-asset operators choose to establish themselves in jurisdictions with more favorable or less stringent regulations. To address these challenges, international regulatory cooperation will be necessary. Only through a coordinated effort among different nations will it be possible to create an effective and uniform regulatory framework that can manage the peculiarities of crypto-assets, protect investors, and prevent regulatory arbitrage.

The magical power of cryptography.

The narrative surrounding crypto-assets often emphasizes their supposed uniqueness and superiority, primarily due to the use of modern cryptography. However, this perspective can be misleading and based on an incomplete understanding of what crypto-assets actually are and how they work. Modern cryptography, which includes complex algorithms and advanced techniques to ensure security and privacy, is a crucial element in the functioning of crypto-assets. It is used to ensure the integrity of transactions, the security of private keys, and the authenticity of blocks in blockchains. However, it is important to recognize that modern cryptography is already widely used in many other financial and commercial sectors to protect electronic transactions, communications, and sensitive data. The main difference between crypto-assets and other financial assets does not lie in the cryptography itself, but in the decentralized architecture of blockchains and the lack of a central authority to regulate and guarantee such assets. Let's therefore try to list some substantial differences such as:

1. Unlike traditional financial systems that rely on central institutions such as banks and governments, crypto-assets operate on decentralized networks of nodes that verify and record transactions. It is defined as decentralization.

2. Once a transaction is recorded on a blockchain, it cannot be modified or deleted, ensuring a high level of data integrity. It is defined as immutability.

3. Cryptocurrency transactions can be conducted without revealing the identities of the parties involved, even though all transactions are publicly visible on the blockchain. It is defined as pseudonymity.

Moreover, to avoid regulatory arbitrage and create an effective regulatory framework, it is crucial that regulatory authorities clearly define what constitutes a crypto-asset. This definition should be uniform and adopted internationally to reduce discrepancies between different jurisdictions. In the following table (Table 1), the main differences, still present and in force, in various jurisdictions are reported:

Table 1

Australia

Network crypto

A cryptographic token is a unit of digital information that can be "used or controlled exclusively by a person, even if that person does not control the hosting hardware on which the token is recorded."

The key passage in this definition is the following: "used or controlled exclusively," which reflects the predominant thinking in the crypto-assets ecosystem, namely that of individual "ownership."

UK

crypto-asset

"It means any cryptographically protected digital representation of value or contractual rights that: a) can be transferred, stored, or exchanged electronically, and b) uses a technology that supports the recording or storage of data (which may include distributed ledger technology)."

The key point of this definition is that it includes any representation of value that is "cryptographically protected."

Europe

crypto-asset - MiCAR

"by crypto-asset is meant a digital representation of value or rights that can be transferred and stored electronically, using distributed ledger technology or a similar technology";

This definition is at least interesting as it covers the digital representation of value or rights "only" if stored on Distributed Ledger Technology (DLT) or similar technology. It follows that if a crypto-asset were stored, for example, on a centralized repository, it would not be regulated, even if it could have all the aforementioned properties of a crypto-asset hosted by a DLT.

USA

crypto-asset

"any digital asset implemented using cryptographic techniques."

Therefore, it is a very broad definition of crypto-assets that concerns any digital asset using cryptographic techniques.

The encryption process is relatively simple, that is, a sender provides a computer with a message (which can be anything) to send along with a key to encrypt the message so that it appears as an incomprehensible language to a reader. When the message is received, the recipient presents it to another computer along with a key; if both keys match, then the recipient will be able to decrypt the initial message. In most schemes, the same key is used by both the sender and the recipient in what is called the "symmetric" key exchange. In the mid-1970s, a new mechanism of an "asymmetric" nature was devised, which uses more sophisticated mathematics and involves the use of two different keys, the so-called private key and the public key, to encrypt and decrypt a secret message. Let's take a practical example. In everyday transactions, if you insert a standard debit/credit card into a merchant's terminal to make a payment, the communication with the payment provider will be encrypted using modern and advanced encryption. Let's say, for example, that I use my contactless debit card to buy bread and the money is immediately deducted from my bank account. Can it be said that my money is a crypto-asset? Based on what is indicated in Table 1, in the United Kingdom, the answer is affirmative, as it is "any cryptographically protected digital representation of value or contractual rights." According to the definition present in the United States, it is equally affirmative, as it is a digital asset implemented with cryptographic techniques. In the same manner in Australia, since it is a cryptographic token, that is, a unit of digital information that can be used or controlled exclusively by one person.

Concluding remarks.

In conclusion, regulatory authorities should rather fully understand how modern cryptography may be used in the future in financial markets and address any resulting regulatory gaps. Essentially, rather than adopting a fragmented, jurisdiction-by-jurisdiction approach to the regulation of constantly evolving crypto-assets, regulatory authorities should come together to consider the much broader and more important issue of new finance, such as Decentralized Finance, better known as DeFi, enabled by cryptography, and propose a more homogeneous and coordinated approach to what this will mean for citizens (more inclusion) and the entire economic system (stability). A coordinated and homogeneous approach to the regulation of crypto-assets and decentralized finance is essential to address the challenges posed by these technological innovations. Regulatory authorities must work together to fully understand the use of cryptography in financial markets, develop regulations that protect investors and promote responsible innovation, and consider the broader impact on the economic system and citizens. Only through international cooperation and an integrated approach will it be possible to fully harness the benefits of the new finance enabled by cryptography. The adoption of blockchain technology presents many legal and regulatory challenges, such as consumer protection and the fight against criminal activities. However, in the global context, a more accessible and innovative financial and fiscal system is needed, capable of improving transaction taxation, automating most fiscal processes, and simplifying burdensome administrative requirements.