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Pathways to European Policy and Regulation in the Crypto-economy

Published online by Cambridge University Press:  10 September 2019

Iris H-Y CHIUOpen the ORCID record for Iris H-Y CHIU[Opens in a new window]
Iris H-Y CHIU*
Affiliation:
Professor of Corporate Law and Financial Regulation, University College London, email: uctlhc0@ucl.ac.uk.
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Abstract

The EU has yet to develop definitive policies for the crypto-economy, and this article argues that policy development should follow a “systemic” and not “sectoral” approach. This is because the crypto-economy is not merely a financialised space and new productive activity is occurring that would benefit from more holistic policy development than regulation focused on securities and investments. This article proposes that the EU should develop policy for the crypto-economy based more broadly on innovation policy and perhaps feed into the Single Market project.

I. Introduction

The crypto-economy has grown in scale over the last couple of years, despite policy-makers’ doubts that the essential characteristicsFootnote 1 of crypto-“currencies” and assets are substitutableFootnote 2 with conventional ones (hence limiting their potential to become mainstream) and that they pose no threat to systemic stability in financial and real economies.Footnote 3 Over US$570m were raised by crypto-token sales in the three months from February to April 2019Footnote 4 and Europe enjoys a significant slice of the action in the crypto-economy. Statistics show that the UK is a popular jurisdiction for crypto-token sales alongside European neighbours France and the Netherlands.Footnote 5 MaltaFootnote 6 hosts the globally popular crypto-exchange, Binance,Footnote 7 not to mention that the world’s oldest and most established crypto-exchange, Coinbase,Footnote 8 serves a global customer base many of whom are based in Europe and the UK.

There is substantial EU-level discussion in relation to the crypto-economyFootnote 9 and the technology that powers this economy, ie distributed ledger technology,Footnote 10 but definitive regulatory policies are not yet offered. This article discusses the contesting forces that are shaping regulatory policy and argues that EU innovation policy provides an optimal basis for the fashioning of a regulatory policy that is likely to be more comprehensive and thoughtful in nature.

Policy-makers may hesitate to nail down regulatory policy for the crypto-economy. Technological developments introduce new phenomena at a tremendous pace and there is concern that regulatory law can be inflexible in nature.Footnote 11 There is a cautionary feel against the prematurity of legalising or regulating, especially at the EU level, as law is of a constitutive nature, being the means by which the economic order for the Single Market is built up,Footnote 12 and is expressed in the instruments of the regulatory state,Footnote 13 a key institution of governance in the EU. However, as Zumbansen puts it:

[L]aw ought to be understood as a social system whose function should be seen in allowing communicative meaning to survive from the battlefield of contemporary conflict into tomorrow’s search for stability, certainty (and memory). Law can fulfil this stabilising function – despite, or should we say because of its relative autonomy from the rule-production that is otherwise taking place in the parameters of economic exchange or political discourse…. At the same time, law competes with other narratives in making sense of the present regulatory challenges.Footnote 14

We argue in this article that the main “battle of contemporary conflict” in relation to fashioning EU regulatory policy for the crypto-economy lies in the contest between sectoral regulation, ie the regulatory field for finance, and a more broad-based regulatory agenda that extends beyond financial sectoral regulation. We see “sense-making” being developed in EU policy and academic discussionsFootnote 15 relating to the crypto-economy and distributed ledger technology, but such “sense-making” seems divided between two trajectories of policy development. One trajectory is to focus on similarities between crypto-fund-raising and assets, and conventional financial market equivalents. This results in a sectoral regulatory approach focused on finance. The other trajectory is to consider a new suite of economic regulatory policy for the novel features of the crypto-economy. The hesitation in adopting either trajectory is not helped by the lack of international convergence.Footnote 16

In Section II, this article argues that the developments in the crypto-economy present two aspects for policy consideration. They are the “productive” and “financialised” aspects respectively. The section will explain these inter-related aspects and argue that the current policy attention paid to the “financialised” aspects is somewhat imbalanced. Due to the hype over crypto-token sales that are unregulated and the fears of investor scams, there may be an urgency to address reform in financial regulation.Footnote 17 However, narrowly focusing policy-making on financial regulation may result in disengaging the financialised aspects of the crypto-economy from its productive aspects. This would cause under-provision of policy development for the “productive” aspects of the crypto-economy, which is argued to be sub-optimal. Section III analyses the drivers in the EU that may steer policy-making towards a narrow “financial” focus as well as the “balancing” drivers that compel consideration of a more holistic approach beyond financial regulation for the crypto-economy. The latter approach in our view is better able to provide for the “productive” aspects of the crypto-economy and facilitate innovation-led benefits for economic growth and development. Section III thus deals with the “battle of contemporary conflict” in relation to the different factors at work that influence EU policy-making for the crypto-economy. We argue that there are “systemic” forces that influence policy-making at the EU level as well as “sectoral” forces. By “systemic”, this article refers to forces influencing EU policy-making in relation to the Single Market or economic constitution, whether in terms of building up the Single Market or maintaining its integrity or confidence. This is differentiated in this article from the use of “sectoral”, which focuses more on the financial services industry, where policy-making adheres to specific aims and goals tied to remits of particular regulatory agencies.

In Section IV, this article argues that a “systemic” approach to regulatory policy-making is optimal.Footnote 18 This approach can be drawn from EU innovation policy, which this section discusses. Importantly, innovation policy encompasses both substantive and procedural aspects and brings in an institutionally-supported and holistic method for deliberations and dialogue. Section V concludes.

II. The governance needs of the crypto-economy

1. A snapshot of the crypto-economy and its financialisation

The beginnings of the crypto-economy lie in the “technological revolution”Footnote 19 in the advent of the blockchain (or distributed ledger technology). The bitcoin blockchainFootnote 20 first allowed a new cadre of economic actors to be introduced (nodes),Footnote 21 defined a new paradigm of production and wealth creation (mining),Footnote 22 and created a unique environment for exchange and community without the need for centralised institutions of trust and enforcement.Footnote 23 The bitcoin blockchain ushered in a new technology for economic interaction that is potentially disruptive, representing a step beyond the platform economy,Footnote 24 which has brought about new business models and markets since the time of eBay in the late 1990s. The “flattening of the world economy”Footnote 25 has galvanised new economic actorhood, activity and creation of wealth. The blockchain takes this further by offering a disintermediated way of economic connection that is yet maintained by automation protocols that foster trust and reliability,Footnote 26 challenging the notion that economic actorhood and activity need to be conventionally organised or ordered.

The development of the ethereum blockchainFootnote 27 is the next significant and crucial step for the revolutionising potential of distributed ledger technology (DLT). The distributed ledger can now support a variety of economic activity more complex than the initially dominant activity of payment transfer, allowing for smart contractsFootnote 28 to be coded and executed on the ledger to effect a range of economic activity, including future or conditional contractual performance. This development crucially underlies two recent trends. One is that the ethereum blockchain can be used by businesses to issue rights and privileges to their supporters, ie the “initial coin offering” (ICO) movement, in return for development finance.Footnote 29 Secondly, the ethereum blockchain can be used to improve efficiencies and reliability in disparate recording and management systems for data, processes or networks, in both commercial and non-commercial contexts.Footnote 30 This article focuses on the first-mentioned development in relation to the building of a crypto-economy as an alternative economic space, as this space is where new issues for policy and regulation arise.

Much of the crypto-economy takes place in an unregulated space but it is observed that many jurisdictions are increasingly extending regulation, especially in relation to ICOs.Footnote 31 These offerings resemble regulated fund-raising such as public offers of securities and give rise to issues of investor protection and regulatory arbitrage. The ease with which developers of distributed ledger technology projects have secured fundingFootnote 32 and the high failure rate of projectsFootnote 33 have raised concerns about the “wild west” of this unregulated space. This development is discussed in greater detail in Section III as a significant trend that can influence EU policy thinking.

In order to fund distributed ledger technology-based development projects, developers typically offer “tokens” in return for crypto-currency such as bitcoin or ether from supporters of the project. These tokens are the native “coin” in the ledger.Footnote 34 What this means is that the “coin”, a standardised piece of code, embodies an entitlement to participate in the ledger as well as a unit of value for transfer. The native coins of the ledger power its economic operations in due course. A number of commentators have profiled the nature of “tokens”Footnote 35 which confer a variety of consideration in return for supporters’ funds. For example, utility tokens confer on subscribers a right (in the future) to use or enjoy certain services developed by the ledger-based business. “Fun” tokens may confer a benefit to the community at large. Investment tokens confer on subscribers a right to participate in a form of investment and are functionally closest to regulated securities or investment funds. Currency tokens confer on subscribers a right to use for payment in a more interoperable manner than utility tokens. Examples include bitcoin, ether or other coins of more significant circulation and volume of trading.Footnote 36

KaalFootnote 37 documents that the majority of initial coin offerings are for “utility tokens”. It has been argued that the need for regulatory arbitrage is the key reason for this form of fund-raising, ie that developers structure the fund-raising as pre-sales of goods or services in order to avoid being classified as offering securities without complying with the securities regulation.Footnote 38 However, the sales of “coins” or “tokens” can also be regarded as intrinsic to the DLT-based business model as tokens are an integrated representation of productive participation and economic value on the ledger.Footnote 39 Pre-selling the native coin/token of the ledger ensures a critical mass of participation (or network effects) for the DLT-based business model when it becomes live. However, as the mechanics of fund-raising mimic the market for conventional securities fund-raising, policy-makers remain divided as to whether token sales should be subject to securities regulation.

The fund-raising mechanics include developers’ production of a white paper, which is a form of voluntary disclosure, mimicking the disclosure document for securities fund-raising. Footnote 40 A variety of information services have also arisen in this unregulated sphere to bridge developers and supporters. For example, coindesk.com carries announcements and opinions on upcoming offerings, and services such as Smith and Crown maintain upcoming ICO lists. Services that “vet” or “rate” upcoming ICOs have emerged to fulfil an information mediation role. For example, ICOBench provides ratings (a numerical figure out of 5) for the ICO profile, team, vision and product. Platforms have arisen to host the primary market in ICOs, and they reputationally back an ICO in order to mediate information asymmetry (eg CoinList, ICO Engine, BlockEx). It is noteworthy that many platforms acting as primary markets and rating services are new businesses, sometimes offering ICOs themselves. This landscape arguably resembles the eco-system surrounding companies’ “initial public offers”, from book-building, information intermediaries and primary markets, missing only the key intermediary of an investment bank.

Supporters are attracted to such pre-sales because of the “liquefication” of tokens. The tokens conferred on purchasers at pre-sales can usually be immediately traded away, on one of many digital asset exchanges that have arisen all over the world, in exchange for more popular crypto-currencies such as bitcoin or ether, which can then be exchanged for fiat currencies. The “liquefication” of tokens fundamentally allows them to become financialised, turning tokens into financial instruments, which the Bank of England now defines as “generally held as investments by people who expect their value to rise”.Footnote 41 Crucially the liquefication of tokens appeals to a wide range of potential purchasers of tokens who are not committed to the project and can be speculators. In essence the crypto-economy has been transformed into a crypto investment economy by virtue of token financialisation. Footnote 42 The value generated by the crypto-economy is very much seen now in terms of the value raised by ICOsFootnote 43 and there is far more hype surrounding the launch of an offering than the launch of the project that is to be developed after the offering.

As will be discussed in Section III, immediate regulatory discussions revolve around whether securities or investment regulation should be extended to tokens, especially utility tokens. This approach is “coherentist”Footnote 44 as it seeks to fit innovations into existing legal frameworks.Footnote 45 Existing legal frameworks are not always technology-neutral and timeless, and financial regulation exhibits a high level of anchoring in precisely-described financial technology, such as in relation to defining securities,Footnote 46 investment funds,Footnote 47 and other financial instruments. This makes it difficult to establish unequivocal fits between token financing and existing regulatory regimes. Significant amounts of legal effort can be spent on arguments regarding the interpretation of regulatory scope and boundaries. This work does not revisit the issues of where the “fits” lie, as there is substantial existing academic writing in this area.Footnote 48 Many regulators worldwide engage with this approach but we argue that one should take a step back from the contests in legal characterisation of fund-raising and look at the crypto-economy as an alternative economic space as a whole. This allows us to understand the crypto-economy in relation to two aspects: its productive and financialised aspects.

2. The productive aspects of the crypto-economy

At its truly disruptive level, a DLT-based business model can be distinguished from accepted corporate or partnership forms, and its financing needs explain the optimality of token financing. The productive aspects of the DLT-based business model have implications for new economic productivities and mobilisation. In this manner, regulatory design for both the productive and financialised aspects can be fashioned in a holistic manner, preventing the focus on the latter from undermining the former.

DLT-based business models provide peer-to-peer platforms for direct transactions in new forms of commodification,Footnote 49 creating new markets for novel goods or services. For example, DLT-based platforms can facilitate peer-to-peer energy trading, disrupting and challenging existing oligopolistic markets in energy.Footnote 50 WePower’s business model facilitates peer-to-peer trading of green energy that is individually produced by harnessing solar power at home.Footnote 51 Iungo provides a disintermediated platform to link up individual wifi services to become a network of global wireless internet;Footnote 52 Golem is a business model that allows access to individual computers’ idle power for a fee,Footnote 53 and brings together a network of computers willing to share their “excess capacities”. There is also potential in Cappasity’s model of creating a distributed marketplace for online creators of games and virtual reality experiences,Footnote 54 and Madana’s modelFootnote 55 of a distributed marketplace for data that could attempt at disrupting the economic power that big data giants such as Google and Amazon have amassed.Footnote 56

DLT-based business models, like platform economic models in the sharing economy,Footnote 57 create communities of users who engage in different sides of the market, encouraging new economic mobility that is unshackled from the frames of current economic or business models, such as shareholder primacy in corporations,Footnote 58 or the neoliberal disembeddedness of markets from society.Footnote 59 At its best, the crypto-economy modelFootnote 60 has the potential to usher in a new age of an economic society.

The productive aspects of the new crypto-economy present certain novel features. Genuine DLT-based business modelsFootnote 61 feature a high level of decentralisation but also a high degree of standardisation. These models require mass participation to build up alternative networks distinguished from institutional ones, such as Iungo’s global wireless internet, and can be highly “democratised” and open as entry or exit is by purchase or sale of the ledger’s token. At the same time, participation is highly marketised, and the only institutions of “order” are smart contract protocols that standardise transactions and transfers of value. It should not be assumed that smart contractual governance is sufficient and that “code is law”. Various issues can arise that could affect the productive operations in the crypto-economy.

Smart contracts are programmed to execute pre-defined transactions under certain conditions on the ledger and the high levels of standardisation may be inflexible and also unable to deal with “off-chain” legs of the transaction. A smart contract for the purchase and sale of peer-produced energy units may be able to execute the transaction as well as effect and record transfer of value. However, the delivery of the energy units is “off-chain”, ie facilitated by other infrastructure such as the national grid, as the DLT-based platform is not a complete infrastructure for certain types of transactions. It is queried whether there is a need for governance rules in relation to on-chain and off-chain coordination,Footnote 62 such as dispute resolution systems unique to DLT-based platforms.Footnote 63 What if a contractual arrangement ought to be vitiated, for example because it was made with a minor participant or a participant under duress? How would mistakes and errors be dealt with ex post?Footnote 64

If a DLT-based platform is for the purposes of transacting purely on-chain crypto-goods such as crypto-kitties,Footnote 65 the smart contracts may be able to deal with the transaction from end to end. However, this gives rise to the question whether there are indeed central entities maintaining order and integrity on-chain and if so, what organisational form is being maintained by the ledger, and what governance roles and responsibilities central entities should assume. If ledgers are, like the bitcoin blockchain, a permissionless blockchain that institutes a system of trust despite the lack of coordination, there is a need to consider whether developers of the platform, code writers and “miners or minters” who co-create coins/tokens for the system, and therefore, wealth, are particular loci of power in DLT-based systems,Footnote 66 and what their responsibilities should be.Footnote 67 Further, the marketised model can facilitate concentrations in token holdings and it is queried whether this phenomenon and the powers held by token block-holders should be governed.

Commentators have also discussed a number of pertinent legal and regulatory issues such as the legal risks of automationFootnote 68 and data protection and security.Footnote 69 There is a wealth of issues that has surfaced, and there is a need to engage in the larger dialogue in relation to whether regulatory policy is needed in order to facilitate and govern the productive aspects in a holistic manner, such as in relation to organisation of productive activity,Footnote 70 allocation of responsibilities, decision-making and accountabilityFootnote 71 and distribution policies.Footnote 72 These issues complement regulatory thinking in relation to the financialised aspects of the crypto-economy.

III. EU policy on the crypto-economy: no systemic approach yet in sight?

EU policy on the crypto-economy is in development and can be gleaned from the EU Commission’s Action Plan on Fintech,Footnote 73 and policy indications from the European financial regulatory agencies. The European Banking Authority (EBA) has published a report on crypto-assetsFootnote 74 and the European Securities and Markets Authority’s (ESMA) and European Central Bank’s (ECB) have issued earlier papers on blockchain.Footnote 75 Further, the EU’s Blockchain Observatory and Forum has engaged in knowledge production and dialogue.Footnote 76

At the same time, national policy-making is underway in other jurisdictions.Footnote 77 The UKFootnote 78 and LuxembourgFootnote 79 instituted regulatory sandboxes where innovations can be tested in an environment that disapplies regulation to an extent in order for both firms and regulators to learn about the needs of governance. These arenas are likely to interact with EU policy-makingFootnote 80 and EU policy-making is unlikely to be an insular process. However, EU policy-making must still be derived from its governance systems, whether these are multi-level, multi-actored or framed in a variety of possible governance instruments from hard to soft law.Footnote 81

The article turns to how the EU’s own governance systems would make sense of the range of forces that shape its policy-making. In this light, this article argues that sense-making within the EU’s governance systems is in a potential “battle of contemporary conflict” between two trajectories. One is a sectorally-defined trajectory where sense-making converges on the need to generate EU level policy and law in the area of financial regulation. The second is a systemically-driven trajectory that interprets the potential transformations by the crypto-economy more broadly as impacting general business, commerce, social relations and economic structures. Policy-making shaped by such perspectives would include but not be dominated by financial regulation initiatives.

1. Sectorally-defined path for EU policy and regulation of the crypto-economy

The sectorally-defined trajectory for EU policy-making is an attractive one based on the following driving forces. First, many national regulators elsewhere focus on the financialised aspects of the crypto-economy and can influence each other with similar or competitive regulatory approaches. Further, the introduction of Libra by FacebookFootnote 82 may galvanise international response in financial regulation. Second, the development of financial sector regulatory agencies at the EU level has been a culminating moment of pan-European governance and there are movements towards increasing centralisation of policy-making at these agencies. This would be an institutionally-based rationale for relying on the financial sector regulatory agencies to derive relevant policy-making for the crypto-economy. However we also see push-back from the financial sector regulatory agencies in preference for a more holistic approach.

a. Responses from financial regulators worldwide

Many jurisdictions have chosen to frame crypto-economy issues in relation to securities and investments. Some are concerned about regulatory arbitrage and institutional challenges, while others embrace new opportunities and engage in regulatory competitionFootnote 83 to attract the crypto-economy. The variety of approaches taken shows little international convergence except in anti-tax avoidance and anti-money laundering, areas that have already achieved high levels of international convergence.Footnote 84

A few popular jurisdictions for crypto fund-raising have taken the approach of clarifying the financial/securities regulatory perimeter but in a proportionate manner so as not to discourage the budding activities. These jurisdictions engage in a subtle form of regulatory competition. In 2018, Switzerland clarifies that utility tokens are not subject to securities law, and indirectly permits them to be offered as being outside of the regulatory perimeter, via the process of seeking a “no-action” letter from FINMA.Footnote 85 Only offers of securities tokens are to be in compliance with securities regulation. Singapore takes a similar position, as it clarifies that only securities tokens are caught within its regulatory perimeter,Footnote 86 and payment tokens must comply with existing commercial and regulatory laws, such as anti-money laundering laws. In 2019, the UK, a popular jurisdiction for crypto-asset offerings, has also taken a similar position to clarify its existing regulatory perimeter as not including utility and currency tokens.Footnote 87 In this manner, the clarification of the existing regulatory perimeter serves two odd purposes. One is that there appears to be an over-confidence in the adequacy of existing regulatory frameworks and that reform is regarded as unnecessary. This is despite the acknowledgement that utility tokens are not likely to fall within existing regulatory frameworks for securities or payment instruments. Second, it can be argued this approach is intended to be narrow so that implicit permission is given to leave utility tokens to be self-regulatory. Although no formal “exemption” regimes are articulated in Switzerland, Singapore or the UK, “implicit permission” can be derived from the authorities’ clear delineation of the regulatory perimeter and its inapplicability. Perhaps such a position can achieve a balance between the desire to embrace innovation and prevent existing regulation from unduly stifling such innovation, and providing an appearance of strength in the existing regulation and law. These approaches crucially do not expand the existing regulatory perimeter, except where anti-money laundering and tax laws are concerned. Although such approaches do not necessarily deter innovation, they also provide no policy or regulatory leadership.

The US, on the other hand, features a mixture of state-based and federal approaches to the crypto-economy reflecting the dilemmas in taking regulatory leadership and serving a coherentist approach. Where tokens serve payment-like functions, there are signs of appetite in the US for introducing whole new enabling regulatory regimes to cater for new “virtual currency” or money-service businesses. However these endeavours run against the more conservative approaches of the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) which focus more on clamping down on fraud and regulatory arbitrage.

Regulatory policy in the US is very much crafted along the lines of established sectoral delineations, with the regulatory regimes for money service businesses possibly applicable to crypto-currency, the regulatory regime for securities offers possibly applicable to coin/token issuances and the regulatory regime for commodities, futures and derivatives trading possibly applicable to trading in these instruments. There are policy indications towards welcoming the crypto-economy, such as the Uniform Law Commission’s introduction of a piece of uniform legislationFootnote 88 that can provide states with a ready-made template to permit the setting up and due oversight of virtual currency businesses. In this manner, crypto-currency businesses can be legitimised and enter the fray of competition for payment services. However, the Uniform legislation has not yet been passed in any state, and New York’s existing Bitlicence regulations have been criticised as being unduly onerous.Footnote 89

On the other hand, although the Uniform Act is drafted widely to be able to include all types of tokens, it excludes anything within the remit of the SEC and CFTC. Both the SECFootnote 90 and CFTCFootnote 91 have signalled tougher stances against regulatory arbitrage and the need to secure investor protection and market integrity.

The SEC’s investigative report into the initial coin offering made by the DAO (Decentralised Autonomous Organisation) in 2017Footnote 92 first extended securities regulation to token offerings based on the Howey test. The test characterises as a security any investment contract that satisfies the characteristics of being a profit-seeking business venture as a common enterprise. As the DAO issued tokens to participants to contribute to a “common enterprise”, and participants reasonably expected to earn profits through the DAO’s principal objective, which was to fund other projects for a profitable return, the DAO’s token offer met the requirements of the Howey test. However, the SEC has refused to say that tokens structured as “utility” tokens are never securities, and it would be interpreted on a case-by-case basis whether such tokens meet the Howey requirements. Indeed the SEC has intervened to halt and order refunds by Munchee, whose tokens relating to a food reviews ledger were unregistered, and imposed civil penalties on AirFox and Paragon.Footnote 93

The CFTC’s remit extends to trading in various derivative contracts specified in legislation. The Commodities Exchange Act administered by the CFTC also requires registration of trading operators and empowers the CFTC to exercise enforcement authority over fraudulent or manipulative activity on markets.Footnote 94 Although the CFTC’s “Advisory” does not clarify what tokens are likely to be treated as “commodities”,Footnote 95 a number of enforcement decisions potentially have wide import. For example in the CFTC’s enforcement against My Big Coin Pay Inc,Footnote 96 which is a token designed to be a crypto-currency purportedly backed by gold, the decision can be interpreted narrowly or more broadly. A narrow interpretation would be confined to the CFTC’s enforcement against fraudulent schemes, as My Big Coin was issued to fund the founder’s lavish lifestyle and not for project development. Such enforcement may signal that non-fraudulent token offers may not attract enforcement. However, the basis for enforcement against fraudulent schemes is that a “commodity” is involved and the characterisation of My Big Coin as a commodityFootnote 97 would potentially implicate most currency tokens of a similar nature. Further, as utility tokens are presales and would probably involve future delivery beyond the spot market exemption of 28 days, they could also fall within the definition of commodity futures.Footnote 98 The CFTC’s enforcement against Bitfinex,Footnote 99 a crypto trading platform that allows leveraged trading and future delivery beyond 28 days, and Coinflip,Footnote 100 a crypto trading platform in swaps and options, seem to indicate that enforcement is based on the “futures” aspects of trading.

As the US battles between signs of regulatory leadership for crypto-currencies and path-dependency in the SEC’s and CFTC’s approaches, some jurisdictions have taken the approach of holding out as attractive and forward-looking regimes for the relocation of crypto-economic activities and investments. However, these regulatory pioneers have not ventured beyond financial regulation.

Thailand offers an authorisation regimeFootnote 101 for token offerings whether they are designed to function as crypto-currency (ie medium of exchange), utility tokens (ie conferring rights in respect of goods or services) or securities tokens (conferring rights in respect of participation in investment), as well as a regime for authorising token offering portals (ie the platforms used for conducting token offers), digital asset exchanges, brokers and dealers. Such authorisation is based on incorporation in Thailand. This approach presumes that the productive aspects of the crypto-economy are best accommodated within a jurisdiction’s corporate law. This assumption needs to be questioned, as the unique decentralised and standardised aspects of the DLT-based business model may require new thinking in organisational laws and governance. FranceFootnote 102 offers an optional “visa regime” for token issuers subject to a skeletal framework of rules such as disclosure, anti-money laundering and asset custodial duties, in order to exchange for being registered in France (onshoring) and able to engage in general solicitation. Again, this approach is sectorally-focused and presumes that DLT-based business models should best be incorporated.

On the other hand, China has banned crypto-asset commercial activity, ie purchasing, trading, intermediating crypto-asset investments, and payment and exchange services relating to crypto-assets. The Chinese banFootnote 103 has been attributed to policy-makers’ concerns that Chinese capital would be transferred via crypto transactions to overseas markets and evade capital controls.Footnote 104 Further, this ban is also in line with China’s crackdown on shadow banking in general, where financial activity has been shifting away from mainstream regulated institutions that are perceived to be too restrictive or expensive.Footnote 105 South Korea has also banned initial coin offerings and token sales,Footnote 106 but given its existing large markets in crypto-currency trading, it does not ban crypto-currency trading except that such trading cannot be anonymous.Footnote 107 Jurisdictions that take such approaches have unique domestic concerns and do not necessarily contribute to international regulatory leadership.

The European financial regulatory agencies, the EBAFootnote 108 and ESMAFootnote 109 have so far focused on financial aspects such as consumer protection and regulatory arbitrage. The position taken is that existing regulatory regimes are upheld as adequate as they are “technologically-neutral” and regulators take an approach of assessing functional equivalence to see whether tokens sold by DLT-based business models fall within existing regulatory regimes. The focus is on combatting regulatory arbitrage rather than looking at regulatory reform. Indeed Maijoor’s speechFootnote 110 indicates an aversion to design regulatory reform that chases after particular new technologies. The coherentist approachFootnote 111 is followed in regulators’ response to developments in the crypto-economy, such as the extension of anti-money laundering regulationFootnote 112 to crypto-currency businesses, so that channels for money laundering would not be facilitated.

We argue that skewed effects can result from an imbalanced overemphasis on designing regulatory policy for the financialised aspects of the crypto-economy. If token sales are regarded as falling within the regulatory perimeter for securities regulation, regulators would be presuming that the DLT-based business model is a corporate form. Should such a presumption be made? The corporate form may indeed be unsuitable for the DLT-based business models, as concepts of shareholder primacy or directorial control may need adjustment in the face of stakeholder importance and involvement in such economies.Footnote 113 If token sales are not regarded in the same way as securities offerings, the disapplication of securities regulation paves the way for opportunities to rethink economic and regulatory models. Further, commentators may characterise crypto-tokens as futures contracts within a financialised paradigmFootnote 114 but can tokens be regarded as commercial sales instead? Such treatment would pave the way for thinking about potential reforms in sales laws to cater for the productive aspects of DLT-based business models, and entail the development of new commercial rights and obligations.

Regulatory policy focused on financial regulation can also encourage the crypto-economy to become more and excessively financialised, attracting more financiers than productive economic agents to the sphere. Token secondary markets are already highly speculative and volatile,Footnote 115 and this space has become increasingly populated by actors in conventional financial economies, such as institutions, sophisticated and high net worth investorsFootnote 116 who constantly seek yield and diversification of their portfolios in new asset classes.Footnote 117 Policy-makers focus on deterring retail participationFootnote 118 in the “wild west” crypto-markets, reinforcing the crowding-out of their participation. Indeed a narrow focus on meeting the goals of financial regulation, such as attacking regulatory arbitrage, defending the existing regulatory perimeter and consumer protection by deterring entry, would probably result in an excessive financialisation of the crypto-economy, turning it into a market for lemons and high speculation, deterring economic agents who are interested in its productive capacities. Financial innovations such as crypto-derivatives or crypto-funds may also contribute towards excessive speculative and financial participation in the crypto-economy,Footnote 119 eclipsing the attractiveness and development of real productivities.Footnote 120

The development of Facebook’s digital currency Libra may galvanise an internationally concerted response focused on financial regulation. As Facebook has 2 billion existing users, Libra has the potential to become a private money transfer network beyond any national regulation. This has sparked fears of facilitation of money laundering and fraud.Footnote 121 Riding on the international consensus on subjecting crypto-currency to anti-money laundering controls, we may see quickened international policy-making led by central banks and financial regulators, steering policy-making firmly into the realm of money and financial regulation. We advocate against relying on the EU financial regulators to dominate policy-making for the crypto-economy and discuss the contesting forces below that affect the locus of policy-making. We argue that a systemic and holistic approach, as discussed in Section IV, is preferred.

b. The European System of Financial Supervision and its role in regulating the crypto-economy

The European System of Financial Supervision (ESFS) was first created in 2010,Footnote 122 comprising of three agencies, the EBA, ESMA and European Insurance and Occupational Pensions Authority (EIOPA), a Joint Committee of the three authorities and the European Systemic Risk Board (ESRB), a dedicated outfit to monitoring systemic risk which is situated under the umbrella of the ECB. The EBA, ESMA and EIOPA have been created in the aftermath of the global financial crisis, purposed towards preserving the stability and well-functioning of EU financial markets, while not compromising the integration of the internal market.Footnote 123 They oversee national regulators and are chiefly responsible for technocratic policy-making and ensuring regulatory convergence. The three agencies and the Joint Committee have become a technocratic governance system for EU financial regulation. Further, ESMA in particular has become increasingly empowered to assume direct regulatory competencies. This started with oversight of credit rating agenciesFootnote 124 and trade repositories,Footnote 125 seen as pan-European operations. In light of the planned British withdrawal from the EU, there are further plans to increase the remit of ESMA’s pan-European direct authorisation and supervision of regulated entities, bringing an even more centralised approach to EU securities and markets regulation, such as over pan-European collective investment funds of various types, and central counterparties.Footnote 126

The architecture of the ESFS is poised to be the “natural home” for policy development for the crypto-economy. Indeed, there are market failures galore in the crypto-economy that could easily warrant policy intervention, such as dealing with scams, poor market conduct on unregulated markets and the risks posed to investors by custodial services providers.Footnote 127 However, the regulatory agencies have not taken the step of extending the existing regulatory perimeter to crypto-equivalent activities. A key action taken is the issuance of warnings for consumers against participation in the crypto-economy.Footnote 128 Regulators may be wary of prematurely legitimising the crypto-economy for the EU as a whole. Nevertheless, regulatory hesitation does not stop new activities from constantly arising. Warning and deterring the perceived “vulnerable” consumer does not help in preparing themFootnote 129 for new developments and a new economic future. Further, financial regulators’ focus on consumer protection would have the unfortunate effect of exacerbating the financialisation of the crypto-economy and undermining its productive development.

Although the EU regulatory agencies are poised to take technocratic leadership over the policy and regulatory development for the crypto-economy, no significant move has been made. However, the agencies’ refraining has not kickstarted a broader movement for holistic policy consideration. We predict that the financial regulatory agencies are likely to continue to “wait and see” and this position can be supported by the following reasons. First, the agencies rightly see themselves as influencing but ultimately implementing the policies that are approved at the institutional level, ie in the Commission’s communications and policies embodied in law. Second, the agencies are exceedingly mindful of the prematurity of “throwing their weight” behind the crypto-economy while sense-making is underway. Third, the agencies actually perceive a larger picture of the crypto-economy than its financialised aspects and are urging policy-making institutions in the EU to address this. However the third is only tentatively discerned.

The financial regulatory agencies are responsible for market integration, consumer protection and systemic stability monitoring.Footnote 130 Market integration policies emanate from the European Commission, and the Commission has indicated a preference to wait for international developments, possibly from the Financial Stability Board, before formulating any proposal for crypto-assets.Footnote 131 The agencies’ role at the moment may be that of information learning and synthesis, as they are tasked to systemically consider fintech in all aspects of their work, and to monitor national regulators’ development of regulatory sandboxes.Footnote 132

However, it can be argued that the agencies are deliberately slow to put policy reform suggestions forward not because they cannot but because they chose not to do so. The agencies are regarded as technocratic experts and there is no preventing them from giving their views as to what regulatory policy should be instituted, such as in relation to the major move to overhaul prudential regulation for investment firms.Footnote 133 This refraining from articulating definite policy for the crypto-economy is a form of self-restraint that is not explained by limitations of remit alone. Maijoor’s speechFootnote 134 indicates an unwillingness to prematurely recognise the legitimacy of activity in the crypto-economy at the EU level. This may be because the borderless nature of crypto-economic activities may find a natural fit in the Single Market and policy-makers remain unsure whether they wish to build a single market in this new economy. Further, Maijoor’s speech also indicates a preference for technology-neutral laws and regulations to be developed,Footnote 135 so that they can be well-considered and produced for timeless objectives.

It is arguably a myth that financial regulation is mostly technologically-neutral. Although there is an endeavour to grapple with the functional substance of financial products and the type of intermediary service in regulating them,Footnote 136 there has been a need to specify regulatory expectations of conduct in relation to particular types of technology simply because these give rise to specific issues and risks. For example, the Markets in Financial Instruments Directive’s imposition of governance, oversight and responsibilities for algorithmic high-frequency traders shows that specific governance needs were perceived and a functional regulation of market participants’ duties that applied more broadly did not suffice.Footnote 137 It may, however, be argued that market participants’ conduct is largely regulated by market rules and hence regulatory intervention only seeks to provide the public goods where market rules have not. However, the example of the Payment Services Directive 2015 is also raised, where non-bank providers in the payment services markets that deal with effecting payments and aggregating account information services are given recognition, and a regulatory framework for them has been introduced in order to further competition in payment services markets.Footnote 138 Such regulatory policy is developed in order to promote non-bank data-based business models that are able to provide new payment and account management interfaces. It is a response to technological developments. The Commission’s Fintech Action Plan that exhorts use of remote know-your-customer diligence processes and electronic identifications is also a policy that responds to technological developments and signifies acceptance and endorsement.Footnote 139 Hence, to refrain from taking a position on the crypto-economy in terms of its new technology of disintermediated business models and token financing cannot really be attributed to the need for technologically-neutral regulation. Rather, there is still a lack of sense-making in relation to the crypto-economy, hence tentativeness in endorsing or rejecting the technology that underlies and powers the crypto-economy.

The financial regulatory agencies’ refraining from taking steps in financial regulation paves the way for a more systemically-driven approach, which the article argues is the right one. However, there still needs to be a push towards that trajectory, or the refraining on agencies’ part would merely leave a gap for collective action inertia. Cortez warns that a “wait-and-see” attitude with respect to regulating innovative developments may entail regulatory policy that is too inert and late in catching up with governance needs.Footnote 140 We observe that the EBA explicitly warns that policy-making on crypto-assets is not complete without a consideration of broader issues in relation to the crypto-economy that is beyond financial sector regulators’ remit.Footnote 141 However, we tease out the challenges for developing an EU regulatory policy for the crypto-economy at a systemic level.

2. Systemically-driven forces for shaping policy and regulation

There are several factors that would drive a systemic approach to thinking about policy and regulation for the crypto-economy in the EU. First, if the crypto-economy is adopted as part of the Single Market project, whether as part of the Capital Markets UnionFootnote 142 or more broadly, then systemic policy thinking can be developed by the Commission. We will, however, discuss ideological and political pushbacks against this development. Second, if the financialisation of the crypto-economy results in significant financial activity and threats to the systemic stability of the EU financial markets, then there would also probably be concerted action to address such developments, as we have seen how the global financial crisis prompted institutional-level reforms resulting in the ESFSFootnote 143 as well as a range of regulatory reforms cutting across many areas.Footnote 144 However, such developments would not put European governance in good light as policy leadership would be seen as lacking until too late. Finally, a systemic approach to policy and regulation for the crypto-economy can arise out of applying an innovation policy framework. Although EU innovation policy continues to be somewhat fragmented, Section IV offer suggestions on how it can offer a unifying and integrated approach to policy and regulation.

First, would the crypto-economy be adopted as part of the Single Market project? It is arguable that the crypto-economy, being borderless, is rather compatible with the promotion of cross-border economic participation in the Single Market. Further, the crypto-economy features mainly businesses in development or small- or medium-sized enterprises, and the EU has been particularly sympathetic to their developmental financing needs.Footnote 145 However, the adoption of an agenda for the single market in the crypto-economy is likely to be resisted by both the demand and supply sides, ie the crypto-economy developers and the EU policy-makers alike.

On the demand side, crypto-economy developers arguably look to being borderless globally and may not wish to limit themselves to the Single Market. It is already observed that many DLT-based business models are incorporated offshoreFootnote 146 and offer their tokens worldwide. They may have little need of the European passport for access to markets, although the conferment of legitimacy may hugely boost their prospects. Further, the Single Market is regarded as an ordoliberal project,Footnote 147 ie the building up of an economic order of free markets and based on liberal philosophy, but underpinned by an overall public order and institutional governance framework. This philosophical underpinning of the Single Market may be regarded as incompatible with the crypto-economy, which is highly decentralised and – according to some commentators – represents an anarcho-capitalist order defying conventional authority and institutional structures.Footnote 148 Even if crypto-economy developers do not necessarily take such an anti-establishment stance, the ethos of the crypto-economy is bottom-up in nature and appeals to a new form of democracy and participation.Footnote 149 Hence there may be wariness against the economic governance policies and institutions of the EU. There is significant literature critiquing European economic governance as being too strait-jacketing and liable to produce injustice,Footnote 150 being too dogmatic in relation to its preference for technocratic stewardship of economic and market policies and thus becoming socially disembeddedFootnote 151 and politically unaccountable.Footnote 152 More recently, European economic governance has been criticised as being unsustainably centralisedFootnote 153 and unable to coordinate with necessary divergences and diversity of needs at more local levels.Footnote 154

On the supply side, policy-makers may not be keen to include the crypto-economy in the Single Market project as the actors in the crypto-economy are institutionally unfamiliarFootnote 155 and there is therefore an absence of political trust to bring the crypto-economy developers within the fold of the Single Market project. Crypto-economy developers first developed alternative currency to represent and transfer value, challenging sovereign-backed currencies, thus pitting themselves as challengers to existing institutions. Policy-makers have repeatedly disavowed the characteristics of crypto-currencies as sufficient for becoming “money”.Footnote 156 Token issuers, however, continue to embrace the “alternative” ethos of creating and representing value in private terms via the ledger’s native token.Footnote 157 As different tokens populate the crypto-economy, it may be increasingly difficult for tokens to gain such network effects as to really disrupt conventional instruments of money and investment. Policy-makers may wish to leave this unregulated space alone, as it could be strategic to allow the competition of tokens to result in their own demise, rather than to confer legitimacy and lend traction to their disruptive designs. Regulatory policy has thus far focused on existing familiar industry structures, such as the industry for fund and asset management,Footnote 158 to develop a range of financing products to meet needs such as in infrastructure,Footnote 159 social entrepreneurshipFootnote 160 or venture-capital.Footnote 161 These would be offered by conventional investment intermediaries, a sector already regulated and deeply engaged by policy and governance institutions in the EU.Footnote 162

Further, policy-makers may not be keen to develop economic governance for the crypto-economy as harmonisation of rules relating to the productive aspects of conventional economies has already had a chequered past, such as in relation to harmonisation of company laws in the EU. The productive aspects of conventional economies are deeply rooted in different national political economiesFootnote 163 where for example, different relations or bargains have been struck between labour and capital,Footnote 164 different industrial policies exist,Footnote 165 and different legal frameworks for economic actors such as creditors, suppliers etc exist.Footnote 166 Hence, it can be noted that harmonising EU company law has been tricky and gradual,Footnote 167 as fundamental contextual and institutional differences in member states do not justify a one size fits-all approach. Further, even in securities markets regulation, where standards of corporate governanceFootnote 168 or shareholder stewardshipFootnote 169 have gained convergent adoption, there remain differences in detail applicable to different capital markets.Footnote 170 It may, however, be argued that institutional baggage would not be an issue for the crypto-economy as charting away from institutional frameworks has been its design, and it may be easier and more efficient to introduce harmonisation thinking for policy and regulation for the crypto-economy.

On whether there may be financial systemic stability threats from the crypto-economy that may compel concerted action on the part of EU policy-makers, the Financial Stability Board has dismissed such threats, as the scale of activity is currently small compared to conventional financial economies.Footnote 171 However, as crypto-currency has always been meant to operate interchangeably with fiat currency,Footnote 172 this fundamental tenet of exchange makes the crypto-economy porous to real and financial economies. Further, Facebook’s Libra project may pose threats to financial integrity and stability at scale. Conventional financial actors may become new intermediaries for the crypto-economy as they propose to develop financial products in the form of funds, such as exchange-traded funds,Footnote 173 in order to invite the participation of investors, such as venture capital investors who seek exposure to the new crypto-asset class. Although many crypto-asset exchanges do not erect barriers to trading entry, such as are found in conventional securities and derivatives markets,Footnote 174 investors may be overwhelmed by the landscape of noise and hype or may not be confident in constructing portfolios for themselves. Existing financial intermediaries are moving into this space to intermediate and seek rent, leveraging upon their incumbent status in conventional financial economies to capture the new investment space.Footnote 175 It remains to be seen whether the scale of conventional, particularly institutional participation in the crypto-economy will rise to more significant proportions and attract policy-makers’ attention. On the one hand, this may result in financial-sector focused reforms rather than systemic reforms. However, policy-makers after the global financial crisis 2007–09 have become more forward-lookingFootnote 176 in order not to be seen as clueless after the fact. Policy development prompted by large-scale concerns such as global stability may galvanise policy and regulatory development at a systemic level.

Finally, we suggest that systemic policy and regulatory development can come from the adoption of a more broad-based innovation policy in relation to the crypto-economy. The lens of innovation provides a different perspective from which to understand the crypto-economy, not just as a space for regulatory arbitrage, being anti-establishment or anarcho-capitalist. The focus on innovation frames the question in relation to the economic changes it augurs,Footnote 177 such as the “fourth industrial revolution”,Footnote 178 allowing policy-makers to appreciate disruptive potentialFootnote 179 and possible change to business and economic models. Perspectives can be formed as to whether such innovation is more incremental,Footnote 180 or indeed seismic,Footnote 181 and the high level implications of such innovation including ethicality, sustainability, social and political debate.Footnote 182 The lens of innovation policy is argued to be ideal for fostering policy and regulatory development at a systemic level that integrates thinking across a broad spectrum of issues and not merely focused on financial governance.

It may be said that the EU has instituted the Blockchain Observatory and Forum to systematically unpack the innovative potential of distributed ledger technology, and this is the beginning of a systemic approach. We do not disagree, as the Observatory and Forum explicitly refers to its interest in making policy recommendations to the European Commission.Footnote 183 However, the Observatory and Forum is a relatively small network at the moment, led by one industry participant and four university participants, three of which are in the UK and may be affected by the UK’s withdrawal from the EU in due course. There is a need to consider embedding the policy agenda more deeply within the European institutional governance framework for innovation.

IV. Innovation policy as the framework for designing regulatory governance

We argue that innovation policy provides an optimal basis for developing a systemically-driven framework for regulatory policy in the crypto-economy. Such a framework allows us to take stock of, learn and study the aspects of innovationFootnote 184 and their potential for change, and also consider how such change/s should be governed.Footnote 185

The innovative aspects of the crypto-economy cut across industries, sectors and national economies in relation to: (a) business models; (b) technological transformation; (c) new economic connectivities; (d) new economic actors and productivities and (e) new economic derivatives:

  1. (a) in relation to business models, as discussed in Section II above, DLT-based business models are highly decentralised business models that can offer unique goods and services most optimally offered over a blockchain. These models mobilise mass participation towards the provision of network or collective goods or services in the model of a sharing economy;Footnote 186

  2. (b) in relation to technological transformation, distributed ledger technology is a breakthrough that brings together network computing and a protocol of validation and verification through cryptographic methods, therefore enabling more and more complex forms of automation in commercial and non-commercial interactions;Footnote 187

  3. (c) in relation to forming new connectivities, smart contracting over DLT platforms can change the dynamics of social and economic relations across different geographies;Footnote 188

  4. (d) in relation to new products, services and commodification, DLT-based business models introduce new commodification beyond the sharing economy which has already brought about changes in terms of how products and services are provided.Footnote 189 Uber allows people who own a car to commodify their “excess capacity” and generate revenue from carrying out taxi services when available to do so, and AirBnB allows people to commodify their spare rooms in order to generate revenue from holiday lodgers. Commodification raises new issues in relation to how socio-economic relations are conceived and whether more calculativeness is encouraged generally.Footnote 190 These implications should be debated upon in systemic policy thinking;

  5. (e) in relation to “derivative” products such as finance, crypto-tokens provide a new asset class from which hedging and investible assets can be further created.Footnote 191

A systemic approach is appropriate for considering all the developments and implications of the crypto-economy,Footnote 192 in relation to the goals and objectives of EU policy-making, whether for enhancing growth, economic development and performance of EU economies generally, or for protective purposes such as protection from harm and mitigation of risks.Footnote 193 In this sense we echo commentators’ exhortation that innovation policy should be led by public policy. Mazzucato et al support a public policy-led innovation framework as successful innovation requires commitment and governance, as well as funding, both publicly and privately sourced, and public policy leadership can mitigate the ills of myopia and short-termism that the private sector is so frequently embroiled in.Footnote 194 Further commentators also support a pro-innovation policy, especially in the aftermath of economic crises, in order to facilitate productive recovery and rejuvenation, such pro-innovation policy being able to especially counter the challenges of limited fiscal policies.Footnote 195

1. EU innovation policy

In the early 2000s, Borràs wrote of an emerging governance framework for innovation in the EU.Footnote 196 Such a policy has been driven by Europeanisation pursuant to the goals and aims underpinning the Single Market project and to an extent replaces “national innovation systems”Footnote 197 that seem to be lacking or incoherent in many developed countries, as an OECD survey suggested. Governance of innovation at the EU is nevertheless multi-level and faceted, reflecting the need for reflexive and not top-down governance in this complex polity,Footnote 198 as well as devolving into different specific trajectories in specific issue areas.Footnote 199 However, there are certain integrated tenets teased out by commentators that can usefully form a framework for considering the crypto-economy more holistically. These tenets are:

  1. (a) leadership in fostering innovation by funding. As the European Commission has a dedicated Research and Innovation division that focuses on fostering and funding innovation, such leadership is invaluable for signalling policy leadership and implementing innovation;Footnote 200

  2. (b) high level goals and aims in which innovation can be nested, such as the EU Horizon 2020 vision;Footnote 201

  3. (c) institutional structures that can facilitate innovation in environments of certainty and support, such as the fostering of pan-European intellectual property rights and the development of appropriate European standards;Footnote 202

  4. (d) institutional structures that incorporate balanced considerations between pro-innovation and protection concerns, such as “responsible innovation” policies,Footnote 203 ie bringing considerations of ethicality, sustainability, protection from harm (whether precautionary or ex post), alongside pro-innovation policies.Footnote 204 Recent initiatives such as the General Data Protection Regulation arguably aims to strike such a balance in protecting individuals’ privacy and the use and keeping of their personal data vis a vis commercial convenience;

  5. (e) multi-level dialogic frameworks for learning and coordination amongst various public and private sector actors although such networks can be criticised for being opaque and not sufficiently open to democratic participation.Footnote 205

Developing an EU innovation policy framework allows for leveraging upon centralised institutional structures as well as engaging in networked dialogue, learning and coordination with local and stakeholder levels.Footnote 206 Such a policy framework should also facilitate more inclusive networking with local and stakeholder levels than is currently envisaged under the Blockchain Observatory and Forum. Such a framework is appropriate for governing change, Footnote 207 so that agents for change and their intentionalities (which may not merely be incentive-based) can be mapped, and we can more clearly discern the structures that create opportunities for change and entrepreneurship. Institutional factors can then be mapped in relation to how they facilitate or impede change, while broadly considering the levels of democratic participation in shaping policy.

A governance framework for innovation and change at the EU level provides a systemic approach to derive policy and regulation, and will probably facilitate a more holistic and long-termist response to the developments in the crypto-economy.

V. Conclusion

This article argues that the EU should consider policy and regulation for the crypto-economy in a systemic and holistic manner, and its institutions and governance frameworks lend themselves to policy-making in that manner. This article argues that the systemic approach to developing policy and regulation is important as the crypto-economy gives rise to new productive aspects that should be carefully considered in relation to economic development, mobilisation and the single market project. Although much global attention is given to the financialised aspects of the crypto-economy and regulatory pioneers seem focused on developing financial and securities regulatory policies, such an approach is narrow in nature and may indeed reinforce the adverse effects of excessive financialisation in the crypto-economy. This article proposes that the EU should develop a framework for innovation and governing change to consider the developments in the crypto-economy, so that policy and regulation can be developed in a holistic manner and perhaps feed into the Single Market project.

Footnotes

1 There is extensive discussion that crypto-currencies are not currency as they do not really work as a store of value or unit of account, and that even if treated as “assets”, their price volatility greatly impairs their desirability, see for example BIS Annual Economic Report 2018, “Cryptocurrencies – Looking Beyond the Hype”, Part V at <www.bis.org/publ/arpdf/ar2018e5.pdf>.

2 In an earlier work, I look at substitutability as a key aspect of whether we should consider a novel trend as “disruptive”: see IH-Y Chiu, “Fintech and Disruptive Business Models in Financial Products, Intermediation and Markets – Policy Implications for Financial Regulators” (2016) 21 Journal of Technology Law and Policy 168.

3 Mark Carney, in a letter as Chair of the Financial Stability Board to the G20 Finance ministers and central bankers, 13 March 2018 at <www.fsb.org/wp-content/uploads/P180318.pdf>.

4 See <www.coinschedule.com/stats>.

5 “Crypto-token sales and market statistics”, available at <www.coinschedule.com/stats-geo/ALL?dates=Feb%2001,%202019%20to%20Apr%2026,%202019>, providing details of popular jurisdictions and funds raised from token sales by time periods, geography etc.

6 See “Best Bitcoin and Cryptocurrency Exchange Reviews” at <www.buybitcoinworldwide.com/exchanges/>.

7 See <www.binance.com/>; according to coinmarketcap.com, over US$14bn was being traded on Binance as of 26 April 2019, see <coinmarketcap.com/exchanges/binance/>.

8 See <www.coinbase.com/>.

9 Such as the EU Commission’s Fintech action plan, EU Commission Communication, FinTech Action plan: For a More Competitive and Innovative European Financial Sector (2018) and European Banking Authority, Report with Advice for the European Commission on Crypto-assets (January 2019) at <eba.europa.eu/documents/10180/2545547/EBA+Report+on+crypto+assets.pdf>.

10 Such as the establishment of the EU Blockchain Observatory and Forum, at <www.eublockchainforum.eu/>.

11 A critique against legalisation in the EU in C Joerges, “Europe’s Economic Constitution in Crisis” (2013) at <papers.ssrn.com/sol3/papers.cfm?abstract_id=2179595>.

12 PF Kjaer, “European Crises of Legally-Constituted Public Power: From the ‘Law of Corporatism’ To The ‘Law Of Governance’” (2017) 23 European Law Journal 417.

13 G Majone, “The Rise of the Regulatory State in Europe” (1994) 17 West European Politics 77; D Muggë, “From Pragmatism to Dogmatism: European Union Governance, Policy Paradigms and Financial Meltdown” (2011) 16 New Political Economy 185.

14 P Zumbansen, “Spaces and Places: A Systems Theory Approach to Regulatory Competition in European Company Law” (2006) 12 European Law Journal CHK.

15 Finck, M, Blockchain Governance and Regulation in Europe (Cambridge, Cambridge University Press 2018); Kraus, D et al (eds), Blockchains, Smart Contracts, Decentralised Autonomous Organisations and the Law (Cheltenham, Edward Elgar 2019).

16 There is no movement towards international convergence in regulatory policy for the crypto-economy, but the Financial Stability Board carries out a survey and monitoring function, see FSB, Crypto-asset Markets (2018) at <www.fsb.org/wp-content/uploads/P101018.pdf>.

17 UK’s Crypto-assets Task Force Report (2018), at <assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_final_report_final_web.pdf>, para 1.5. The report points out ongoing research and thinking about the crypto-economy and blockchain technology more holistically, but seems to indicate that policy urgency is driven by the rise in crypto-assets coming to unregulated markets.

18 The lens of innovation policy is explored in Section IV. It is also noted that a more “holistic” agenda for regulatory thinking in the crypto-economy is urged by the EBA, supra, note 9.

19 See Perez, C, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (Cheltenham, Edward Elgar 2002).

20 S Nakamoto, “Bitcoin: A Peer to Peer Electronic Cash System” (2008) at <bitcoin.org/bitcoin.pdf>.

21 Ie anyone who wished to connect his/her computer to the blockchain.

22 New value can be created on the blockchain by performing maintenance tasks based on cryptographic validation, ie the performance of those tasks leads to reward in value that can be used on the blockchain.

23 This is because the blockchain relies on a system of decentralised work of verification and validation that is aimed at being tamper-proof.

24 M Kenney and J Zysman, “The Rise of the Platform Economy” (2016) Issues in Science and Technology 61 which sees digital platforms as offering new business models, at <www.nbp.pl/badania/seminaria/25x2016_2.pdf>.

25 Friedman, TL, The World is Flat (Farrar, Straus and Giroux 2005); Hadfield, G, Rules for a Flat World (Oxford: Oxford University Press 2016).

26 The distributed ledger is a concept whereby all nodes maintain the same copy of transactions and last-done status of the ledger, so that all records are immutable, indelible and cannot be arbitrarily adjusted. This is described as “trustless trust” but see limitations discussed in K Werbach, “Trust, But Verify: Why the Blockchain Needs the Law” (2018) 33 Berkeley Tech Law Journal 489.

27 See <www.coindesk.com/information/who-created-ethereum>.

28 These are pieces of code or algorithms designed to execute certain commands if certain conditions are met, resulting in the execution or formation of legal obligations, hence “smart contracts”, see N Szabo, “Smart Contracts: Building Blocks for Digital Markets”, University of Amsterdam (1996), <www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html>, and layman’s version at <www.coindesk.com/information/ethereum-smart-contracts-work>.

29 There is a lot of literature mapping the universe of ICOs, see S Adhami et al, “Why do Businesses Go Crypto? An Empirical Analysis of Initial Coin Offerings” (2018) 100 Journal of Economics and Business 64; D Zetzsche et al, “The ICO Gold Rush: It’s a Scam, it’s a Bubble, it’s a Super Challenge for Regulators” (2017) <ssrn.com/abstract=3072298>.

30 This was discussed in relation to a variety of areas such as clearing and settlement, ESMA, The Distributed Ledger Technology Applied to Securities Markets (Discussion Paper, June 2016); A Pinna and W Ruttenberg, “Distributed Ledger Technologies in Securities Post-Trading” (ECB Working Paper 2016); DS Evans, “Economic Aspects of Bitcoin and Other Decentralized Public-Ledger Currency Platforms” (2014) <ssrn.com/abstract=2424516>. On shareholder voting see C van der Elst, “Blockchain and Smart Contracting for the Shareholder Community” (2018) <papers.ssrn.com/sol3/papers.cfm?abstract_id=3219146>. On management of networks such as supply chains, see K Kopela et al, “Digital Supply Chain Transformation toward Blockchain Integration” (2017) at <scholarspace.manoa.hawaii.edu/bitstream/10125/41666/paper0517.pdf>. Also DLT can be used to create records in order to prevent tampering, such as in relation to food aid and distribution in Africa, see <www.coindesk.com/un-food-program-to-expand-blockchain-testing-to-african-supply-chain>.

31 Discussed below. This is the term initially used for crypto-token sales, but the terminology has moved on to distinguish between token sales and ICOs, as the former may be private sales and not open to the public. The more generic description of token sales may also be intended to disengage association with initial public/securities offerings.

32 See the statistics mentioned, supra, note 4.

33 A Alexandre, “New Study Says 80 Percent of ICOs Conducted in 2017 Were Scams” (2018) at <cointelegraph.com/news/new-study-says-80-percent-of-icos-conducted-in-2017-were-scams>.

34 B Buchwalter, “Decrypting Cryptoassets: A Classication And Its Implications” (2019) at <ssrn.com/abstract=3271641>.

35 P Hacker and C Thomale, “Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law” (2018) ECFR 645; Zetzsche et al, supra, note 29; J Rohr and A Wright, “Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets” (2017) at <ssrn.com/abstract=3048104> amongst others.

36 Lee, D (ed), The Handbook of Digital Currencies (Elsevier 2015).

37 WA Kaal, “Crypto-Economics- The Top 100 Token Models Compared” (2018) at <ssrn.com/abstract=3249860>.

38 U Rodrigues, “Semi-Public Offerings? Pushing the Boundaries of Securities Law” (2018) at <ssrn.com/abstract=3242205>.

39 Buchwalter, supra, note 34.

40 Zetzsche et al, supra, note 29.

41 See <www.bankofengland.co.uk/knowledgebank/what-are-crypto-currencies>.

42 Epstein, GA (ed), Financialization and the World Economy (Cheltenham: Edward Elgar 2005) at p 3 defines this term to mean the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the economies.

43 Almost a thousand ICOs were recorded between March 2018 and January 2019, raising over US$18 bn: see <www.coinschedule.com/stats>.

44 R Brownsword, “Regulatory Fitness: Fintech, Funny Money, and Smart Contracts” (2019) 20 European Business Organisations Law Review 5.

45 Also taken in the US, and the UK FCA has clarified the regulatory perimeter, defending but not extending its regulatory scope, see FCA, Guidance on Cryptoassets: Policy Statement (July 2019) at <www.fca.org.uk/publication/policy/ps19-22.pdf>.

46 Such as securities defined for the purposes of the Prospectus Regulation 2017, which are highly tied to corporate forms and a certain understanding of market tradeability or liquidity.

47 For example UCITs as retail investment funds regulated in the EU UCITs Directive 2009 defines such funds in relation to investing in transferable securities, so such a retail investment product is tied to “securities” which as noted above, are defined by their technologies of origination and liquidity.

48 Hacker and Thomale, supra, note 35; IM Barsan, “Legal Challenges of Initial Coin Offerings (ICO)” (2017) 3 RTDF 54.

49 The trend of new commodification that has been made possible by digitalisation is discussed in M Cherry, “Cyber Commodification” (2013) 72 Maryland Law Review 381.

50 Competition in the energy sector, such as in the UK has long been a challenging issue, see for example, Competition in the UK’s Electricity Market (2016) at <assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/556310/Electricity_competition.pdf>, showing that entrenched players (the Big 6 companies) continue to take over 80% of market share, although new and smaller players are challenging such a trend gradually.

51 See <wepower.network/>. Indeed peer-to-peer energy trading is growing in a number of Continental countries, see eg T Morstyn et al, “Using Peer-To-Peer Energy-Trading Platforms to Incentivize Prosumers to Form Federated Power Plants” (2018) 3 Nature Energy; J Giles, “Giles, Jodie. “Peer to Peer Trading and Microgrids – the next Big Thing?” Regen, 21 February 2018, at <www.regen.co.uk/peer-to-peer-trading-and-microgrids-the-next-big-thing/>; D Shipworth,“Peer-to-Peer Energy Trading Using Blockchains” DSM Spotlight The Newsletter of the International Energy Agency Demand-Side Management Programme, No 67, December 2017, pp 5–9, at <www.ieadsm.org/wp/files/IEA-DSM-Spotlight-Issue67-December20171.pdf>.

52 See <iungo.network/>.

53 See <golem.network/>.

54 See <cappasity.com/>.

55 See <www.madana.io/>.

56 JM Barnett, “The Costs of Free: Commodification, Bundling and Concentration” (2017) at <papers.ssrn.com/sol3/papers.cfm?abstract_id=2916859>.

57 Sundarajan, A, The Sharing Economy (MIT Press 2016); A Killeen, “The Confluence of Bitcoin and the Global Sharing Economy” in Lee, supra, note 36, ch 24.

58 See much more extensive discussion in A Keay, “Shareholder Primacy in Corporate Law: Can it Survive? Should it Survive?” (2010) 7 European Company and Financial Law Review 369. At the global level, shareholder primacy is argued to be the dominant model of the corporate economy: H Hansmann and R Kraakman, “The End of History for Corporate Law” (2000) 89 Georgetown Law Journal 439.

59 J Ikerd, “Sustainable Capitalism: A Matter of Ethics and Morality” (2008) 3 Problems of Sustainable Development 13; G Baars, “‘Reform or Revolution’? Polanyian Versus Marxian Perspectives on the Regulation of The Economic” (2011) 62 NILQ 415; Boldeman, L, The Cult of the Market (ANU Press 2007) generally.

60 See the vision in P De Filippi, “Translating Commons-Based Peer Production Values into Metrics: Toward Commons-Based Cryptocurrencies” in Lee, supra, note 36, ch 23.

61 Because of the successes of many early ICOs, many business proposals that are framed as ICOs chase after the hype but are not necessarily unique to being powered by distributed ledger technology. See “A Failed ICO is Trying to Flog Itself on Ebay” (Financial Times, 25 March 2019) at <ftalphaville.ft.com/2019/03/25/1553498702000/A-failed-ICO-is-trying-to-flog-itself-on-eBay-/>.

62 Finck, supra, note 15.

63 Möslein, F, “Legal Boundaries of Blockchain Technologies: Smart Contracts as Self-Help?” in De Franceschi, A et al (eds), Digital Revolution – New Challenges for Law (Cambridge, Intersentia 2019).

64 S Green, “Smart Contracts : Interpretation and Rectification” (2018) LMCLQ 234.

65 See <www.cryptokitties.co>.

66 Queried in EU Blockchain Observatory and Forum Workshop Report, Legal Recognition of Blockchains & Smart Contracts (2018).

67 Queried in A Walch, “Deconstructing ‘Decentralization’: Exploring the Core Claim of Crypto Systems” (2019) at <ssrn.com/abstract=3326244>; M Tarasiewicza and A Newman, “Cryptocurrencies as Distributed Community Experiments” in Lee, supra, note 36, ch 10. See also K Yeung, “Regulation by Blockchain: The Emerging Battle for Supremacy between the Code of Law and Code as Law” (2019) Modern Law Review (forthcoming); Hacker, P, “Corporate Governance for Complex Cryptocurrencies? A Framework for Stability and Decision Making in Blockchain‐Based Organizations” in Hacker, P et al (eds), Regulating Blockchain: Techno‐Social and Legal Challenges (Oxford, Oxford University Press 2019) p 16.

68 de Fillippi, P and Wright, A, Blockchain and the Law (Mass, Harvard University Press 2018) ch 9.

69 Finck, supra, note 15.

70 Supra, note 66.

71 Supra, note 67.

72 Relating to how creation of wealth should be distributed.

73 FinTech Action Plan, supra, note 9.

74 EBA, Report with Advice to the European Commission on Cryptoassets (December 2018) at <eba.europa.eu/documents/10180/2545547/EBA+Report+on+crypto+assets.pdf>.

75 ESMA, The Distributed Ledger Technology Applied to Securities Markets (Discussion Paper, June 2016); Pinna and Ruttenberg, supra, note 30.

76 Footnote ibid.

77 See discussion in text below.

78 The UK’s regulatory sandbox regime is discussed in IH-Y Chiu, “A Rational Regulatory Strategy for Governing Financial Innovation” (2017) 8 EJRR 743.

79 DA Zetzsche et al, “Regulating a Revolution: From Regulatory Sandboxes to Smart Regulation” (2017) 23 Fordham Journal of Corporate and Financial Law 31.

80 Delemarle, A and Laredo, P, “Governing Radical Change” in Borras, S and Edler, J (eds), The Governance of Socio-technical Systems: Explaining Change (Cheltenham, Edward Elgar 2014) at ch 8.

81 Discussed in Tömmel, I, “Modes of Governance and the Institutional Structures in the EU” in Tömmel, I and Verdun, A (eds), Innovative Governance in the European Union (Colorado, Lynne Reiner 2009) ch 2; A Caviedes and W Mass (eds), “Sixty-five Years of European Governance” (2016) 12(1) Journal of Contemporary European Research; DM Trubek and LG Trubek, “New Governance & Legal Regulation: Complementarity, Rivalry, and Transformation” (2006) 13 Columbia Journal of European Law 2.

82 “Libra: Facebook’s Digital Currency” (Financial Times, 31 July 2019) at <www.ft.com/content/0c5c4012-9100-11e9-b7ea-60e35ef678d2>.

83 As there is great mobility in the crypto-economy, regulatory competition can matter. See for a theoretical discussion, Bratton, W et al (eds), International Regulatory Competition and Coordination: Perspectives on Economic Regulation in Europe and the United States (Oxford, Clarendon 1997) ch 1 on how the mobility of incorporating entities matters for real regulatory competition.

84 Girasa’s, RRegulation of Cryptocurrencies and Blockchain Technologies: National and International Perspectives (Palgrave 2018) or books on bitcoin, such as Franco’s, PUnderstandng Bitcoin (John Wiley & Sons 2014).

85 “How FINMA’s ICO Guidelines impact future ICOs in Switzerland” (KPMG, 26 February 2018) at <https://home.kpmg/ch/en/blogs/home/posts/2018/02/finma-ico-guidelines.html>. Also see D Zelic and N Baros, “Cryptocurrency: General Challenges of Legal Regulation and the Swiss Model of Regulation” paper presented at 33rd International Scientific Conference on Economic and Social Development – “Managerial Issues in Modern Business” Warsaw, 26–27 September 2018.

86 Monetary Authority of Singapore, “A Guide to Digital Token Offerings” (13 December 2018) at <www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulations%20Guidance%20and%20Licensing/Securities%20Futures%20and%20Fund%20Management/Regulations%20Guidance%20and%20Licensing/Guidelines/A%20Guide%20to%20Digital%20Token%20Offerings%20last%20updated%20on%2030%20Nov%202018.pdf>.

87 FCA, supra, note 45.

88 Regulation of Virtual Currency Business Act, at <www.uniformlaws.org/committees/community-home?CommunityKey=e104aaa8-c10f-45a7-a34a-0423c2106778>.

89 The Uniform Act potentially covers all forms of tokens, as well-circulated tokens such as bitcoin and ether are arguably as much a “medium of exchange” or “unit of account” as the native coin of a distributed ledger business that has made an ICO. The width of interpretation of both “virtual currency” and “virtual currency business” could cover ICOs themselves, as well as intermediaries that facilitate transfer, trading or custody of tokens. However, this width of interpretation can only be sustained if tokens are definitively not securities or commodities.

90 The SEC’s approach is focused on making “coherentist” interpretations of token offerings in relation to the definition of “security”, see above, Clayton’s response to Ted Budd, at <coincenter.org/files/2019-03/clayton-token-response.pdf>, SEC, “Statement on Digital Asset Securities Issuance and Trading” (16 November 2018) at <www.sec.gov/news/public-statement/digital-asset-securites-issuuance-and-trading>.

91 The CFTC is also focused on interpreting the nature of crypto activities to determine if they fall within its jurisdictional scope, see CFTC, “CFTC Staff Issues Advisory for Virtual Currency Products” (21 May 2018) at <www.cftc.gov/PressRoom/PressReleases/7731-18>.

92 SEC, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (25 July 2017) at <www.sec.gov/litigation/investreport/34-81207.pdf>.

93 “Company Halts ICO After SEC Raises Registration Concerns” (11 December 2017) at <www.sec.gov/news/press-release/2017-227>; “Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities” (16 November 2018) at <www.sec.gov/news/press-release/2018-264>.

94 US Commodity Exchange Act 7 USC § 2a(1)(A)–(C).

95 CFTC, “Customer Advisory: Use Caution When Buying Digital Coins or Tokens” (July 2018) at <www.cftc.gov/sites/default/files/2018-07/customeradvisory_tokens0718.pdf>.

96 CFTC v My Big Coin Pay Inc (26 September 2018) at <www.cftc.gov/sites/default/files/2018-10/enfmybigcoinpayincmemorandum092618.pdf>.

97 See decision above, where Justice Zabel refers to the definition of “commodity” in the Commodity Exchange Act in order to determine the nature of My Big Coin and found in favour of the CFTC’s argument that My Big Coin is a commodity.

98 Commentators have noted that over the years, although the CFTC’s jurisdiction has broadened over all sorts of commodities, there is also a rise in the liberation of trading in their derivatives. Hence inclusion within the scope of “commodity” is not the same as achieving a prohibitive effect, see Balmer, AG, Regulating Financial Derivatives (Cheltenham, Edward Elgar 2018) ch 8; C Muellerleile, “Speculative Boundaries: Chicago and the Regulatory History of US Financial Derivative Markets” (2015) 47 Environment and Planning 1805.

99 “CFTC Orders Bitcoin Exchange Bitfinex to Pay $75,000 for Offering Illegal Off-Exchange Financed Retail Commodity Transactions and Failing to Register as a Futures Commission Merchant” (2 June 2016) at <www.cftc.gov/PressRoom/PressReleases/pr7380-16>.

100 In the Matter of Coinflip, Inc., d/b/a Derivabit, and) Francisco Riordan and the CFTC (17 September 2015) at <www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf>.

101 Baker McKenzie, “A Complete Guide to Cryptocurrencies and ICOs in Thailand” at <www.bakermckenzie.com/-/media/files/insight/publications/2018/09/bk_thailand_completeguidecryptoicos_sep18.pdf?la=en>.

102 Action Plan for Business Growth and Transformation Act (passed on 11 April 2019), summary found at <www.amf-france.org/en_US/Reglementation/Dossiers-thematiques/Fintech/Vers-un-nouveau-regime-pour-les-crypto-actifs-en-France>.

103 “China Officially Bans All Crypto-Related Commercial Activities” (August 2018) at <bitcoinist.com/china-officially-bans-crypto-activities/>.

104 “China Bans All Crypto Events After Spending $3 Billion to Fund Blockchain Startups” (22 August 2018) at <www.newsbtc.com/2018/08/22/china-bans-all-crypto-events-after-spending-3-billion-to-fund-blockchain-startups/>.

105 See Shen, W, Shadow Banking in China: Risk, Regulation and Policy (Cheltenham, Edward Elgar 2016) chs 5–9.

106 “Why South Korea had to ban crypto-ICOs” (2 March 2019) <www.ccn.com/why-south-korea-ban-crypto-ico-risk-billion-dollars>.

107 “South Korea to ban crypto-currency traders from using anonymous bank accounts” (23 January 2018) at <www.reuters.com/article/us-southkorea-bitcoin/south-korea-to-ban-crypto-currency-traders-from-using-anonymous-bank-accounts-idUSKBN1FC069>.

108 EBA, supra, note 74.

109 S Maijoor speech, “Cryptoassets: Time to Deliver” (26 February 2019).

110 Footnote ibid.

111 Brownsword, supra, note 44.

112 Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, Arts 2(1)(g), 3(18) and Preamble paras 8–10.

113 See B Morgan and D Kuch, “Radical Transactionalism: Legal Consciousness, Diverse Economies, and the Sharing Economy” (2015) 42 Journal of Law and Society 556.

114 H Deng et al, “The Regulation of Initial Coin Offerings in China: Problems, Prognoses and Prospects” (2018) 19 EBOR 465.

115 T Bourveau et al, “Initial Coin Offerings: Early Evidence on the Role of Disclosure in the Unregulated Crypto Market” (2018) at <ssrn.com/abstract=3193392>.

116 Sophisticated investors and their financial intermediaries are usually exempted from a wide range of retail customer duties and protection, under the Markets in Financial Instruments Directive, Art 24.

117 For the appetite of institutional investors to diversify into cryptos, which some already regard as an asset class, see L Lin and D Nestacorva, “Venture Capital in the Rise of Crypto Economy: Problems and Prospects” (2019) 16 Berkeley Business Law Journal (forthcoming) and “What We Learnt from 100 Crypto-talks with Institutional Investors” (2019) at <www.coindesk.com/what-we-learned-in-100-crypto-asset-talks-with-institutional-investors>.

118 FCA, Consumer Attitudes and Awareness of Cryptoassets: Research Summary (March 2019) at <www.fca.org.uk/publications/research/consumer-attitudes-and-awareness-cryptoassets-research-summary>.

119 Speculative and risky finance is a Minskian trajectory, see H Minsky, “The Financial Instability Hypothesis” (Levy Institute Working Paper 1992) at <www.levyinstitute.org/pubs/wp74.pdf>, also Avgouleas, E, “Regulating Financial Innovation: A Multifaceted Challenge to Financial Stability, Consumer Protection, and Growth” in Moloney, N et al (eds), Oxford Handbook of Financial Regulation (Oxford, Oxford University Press 2015).

120 A general warning sounded in M Mazzucato and C Perez, “Innovation as Growth Policy: The Challenge for Europe” (2014) at <papers.ssrn.com/sol3/papers.cfm?abstract_id=2742164>.

121 Warnings by Fed Chair Powell at <www.forbes.com/sites/billybambrough/2019/07/11/blow-to-bitcoin-as-fed-chair-jerome-powell-issues-stark-facebook-warning/#1977c23f3eaf>; US Treasury chief and the BOE Governor at <www.bbc.com/news/business-48998304> and <www.theguardian.com/business/2019/jul/02/facebook-warned-libra-crypto-currency-will-come-under-close-scrutiny>. The ECB’s warning is at <www.bloomberg.com/news/articles/2019-07-07/facebook-s-crypto-currency-plan-draws-ecb-warning-on-regulation>.

122 See the EBA, ESMA, EIOPA and ESRB Regulations, infra.

123 J de Larosière et al, Report by the High Level Group on Financial Supervision in the EU (Brussels, 25 February 2009) <https://ec.europa.eu/economy_finance/publications/pages/publication14527_en.pdf>.

124 Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies amended in 2011, 2013.

125 Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.

126 Busch, D, “A Stronger Role for the European Supervisory Authorities in the EU27” in Busch, D et al (eds), The Capital Markets Union in Europe (Oxford, Oxford University Press2019) ch 3.

127 Section II.

128 FCA, “Consumer warning about the risks of investing in crypto-currency CFDs” (November 2017) at <www.fca.org.uk/news/news-stories/consumer-warning-about-risks-investing-crypto-currency-cfds>; FCA, “Cryptoassets” (7 March 2019) at <www.fca.org.uk/consumers/cryptoassets>; “ESAs warn consumers of risks in buying virtual currencies” (12 February 2018) at <eba.europa.eu/-/esas-warn-consumers-of-risks-in-buying-virtual-currencies>.

129 For example the FCA conducted research to show that few consumers understand crypto-currencies or assets and not many participate in these markets, but such a survey need not be “educational” for consumers, see FCA, supra, note 118.

130 These are their legislative remits under their respective founding Regulations.

131 FinTech Action Plan, supra, note 9.

132 Supra.

133 EBA, Advice on New Prudential Framework for Investment Firms (September 2017) at <eba.europa.eu/-/eba-issues-opinion-on-the-design-of-a-new-prudential-framework-for-investment-firms>, which has now been introduced into legislation, see Parliament’s press release in April 2019, at <europa.eu/rapid/press-release_IP-19-2130_en.htm?locale=en>.

134 Supra, note 109.

135 Footnote ibid.

136 This means that the regulatory perimeter was no longer determined according to the label of the institution concerned, such as being a bank, insurance or securities firm, but extended to any institution that is carrying out any of the activities of a functionally equivalent nature. See UK Financial Services Authority’s exemplification of this approach, FSA v Anderson & Others [2010] EWHC 599 (Ch).

137 Markets in Financial Instruments Directive 2014, Art 17.

138 Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC, Arts 46-48, 64-66 on payment initiation service providers’ duties and responsibilities, Arts 33, 69, 97 for account information service providers, for example.

139 FinTech Action Plan, supra, note 9.

140 N Cortez, “Regulating Disruptive Innovation” (2014) 29 Berkeley Technology Law Journal 175.

141 EBA, supra, note 9.

142 See <ec.europa.eu/info/business-economy-euro/growth-and-investment/capital-markets-union_en> for the 2015 initiative and the regulatory output delivered pursuant to this initiative.

143 Discussed earlier, also see Weismann, P, European Agencies and Risk Governance in EU Financial Market Law (Oxford, Routledge 2016).

144 See Andenas, M and Chiu, IH-Y, The Foundations and Future of Financial Regulation (Oxford, Routledge 2014).

145 See <ec.europa.eu/info/business-economy-euro/growth-and-investment/capital-markets-union/capital-markets-union-action-plan/financing-innovation-start-ups-and-non-listed-companies_en> which comprises the Capital Markets Union initiatives to address small business financing such as by dedicated investment fund structures and the regulation of online crowdfunding platforms.

146 Such as the Cayman Islands and the British Virgin Islands.

147 C Joerges, “The European Economic Constitution and its Transformation through the Financial Crisis” (2015) at <papers.ssrn.com/sol3/papers.cfm?abstract_id=2560245>.

148 J Flood and L Robb, “Trust, Anarcho-Capitalism, Blockchain and Initial Coin Offerings” (2017) at <ssrn.com/abstract=3074263>.

149 G Wood and A Buchanan, “Advancing Egalitarianism” in Lee, supra, note 36, ch 19.

150 Mainly in relation to how the single currency entailed implications for fiscal discipline and the stringency of post-crisis fiscal rules for countries that needed financial rescue, see Amtenbrink, F, “New Economic Governance in the European Union: Another Constitutional Battleground?” in Purnhagen, K and Rott, P (eds), Varieties of European Economic Law and Regulation: Liber Amicorum for Hans Micklitz (Heidelberg, Springer 2014) ch 11; A de Streel, “The Evolution of the EU Economic Governance since the Treaty of Maastricht: an Unfinished Task” (2013) 20 Maastrict Journal 3.

151 D Muggë, “From Pragmatism to Dogmatism: European Union Governance, Policy Paradigms and Financial Meltdown” (2011) 16 New Political Economy 185; M Everson, “A Technology of Expertise: EU Financial Services Agencies” (LSE Working Papers 2012).

152 PF Kjaer, “European Crises of Legally-Constituted Public Power: From the ‘Law of Corporatism’ To The ‘Law Of Governance’” (2017) 23 European Law Journal 417.

153 W Munchau, “The Unsustainable Unbreakable Eurozone” (Financial Times, 28 April 2019) looking at the unsustainability of managing European countries’ fiscal crises sustainably for the future.

154 Muggë, supra, note 151; Fabbrini, S, “Beyond Intergovernmentalism: The Puzzle of European Economic Governance” in Rodrigues, MJ and Xiarchogiannopoulou, E (eds), The Eurozone Crisis and the Transformation of the EU Governance: External And Internal Implications (Aldershot, Ashgate 2014) ch 4.

155 HE Aldrich and CM Fiol, “Fools Rush in? The Institutional Context of Industry Creation” (1994) 19 Academy of Management Review 645, discussing how unfamiliarity (in a more social and cognitive sense) entails institutional and political distrust of innovation.

156 BIS Annual Economic Report 2018, supra, note 1.

157 Tokens are offered for crypto-currency such as bitcoin or ether in return.

158 The EU Commission continues to appeal to the asset management industry for example, in relation to developing sustainable finance, see proposals in EU High Level Expert Group on Sustainable Finance (HLEG), Financing a Sustainable European Economy (HLEG (2018)).

159 Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds.

160 Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds.

161 Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds.

162 E Monnet et al, “Europe between Financial Repression and Regulatory Capture” (Bruegel Working Paper 2014) at <bruegel.org/wp-content/uploads/imported/publications/WP_2014_08_.pdf>. The dominance of the industry’s influence on financial sector governance and policy is also discussed in Mooschlechner, P et al (eds), The Political Economy of Financial Market Regulation (Cheltenham, Edward Elgar 2006); S Pagliari, “Who Governs Finance? The Shifting Public-Private Divide in the Regulation of Derivatives, Rating Agencies and Hedge Funds” (2012) 18 European Law Journal 44.

163 P Zumbansen, “Spaces and Places: A Systems Theory Approach to Regulatory Competition in European Company Law” (2006) 12 European Law Journal 534.

164 Such as co-determination in Germany, but contrast with the UK where company law is insularly focused on shareholder-management relations, leaving labour to contractual systems. See Hall, PA and Soskice, D, “An Introduction to Varieties of Capitalism” in Hall, PA and Soskice, D (eds), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford, Oxford University Press 2001) ch 1.

165 For example, the French have an industrial policy to support national champions, but the UK has engaged in systematic privatisation since the 1980s.

166 Different jurisdictions provide different creditor rights vis-à-vis companies, and recent developments – such as the Dutch approach of broking covenants between firms and government in order to ensure that firms do not engage in abuses in their supply chain – are different from other jurisdictions, such as the UK’s approach that leave supply chain governance to largely contractual governance but subject to skeletal forms of disclosure: Modern Slavery Act 2015, s 54.

167 Zumbansen, supra, note 163.

168 M Siems, “Convergence in Corporate Governance: A Leximetric Approach” (2010) 35 Journal of Corporation Law 729; C Gerner-Beuerle, “Determinants of Corporate Governance Codes” (2014) at <papers.ssrn.com/sol3/papers.cfm?abstract_id=2346673>.

169 JG Hill, “Good Activist/Bad Activist: The Rise of International Stewardship Codes” (2018) 41 Seattle University Law Review 497.

170 G Goto, “The Logic and Limits of Stewardship Codes: The Case of Japan” (2019) Berkeley Business Law Journal (forthcoming).

171 Carney, supra, note 3.

172 Nakamoto, supra, note 20.

173 WM Peaster, “Crypto & Blockchain Exchange-Traded Funds (ETFs) Launching in Europe” (March 2019) at <blockonomi.com/crypto-blockchain-etfs-europe/>.

174 Ie by brokers who intermediate exchange, and potential abuses: see N Gunningham, “Private Ordering, Self-regulation and Futures Markets: A Comparative Study of Informal Social Control” (1991) 13 Law and Policy 297.

175 Fidelity, the asset manager, intends to provide crypto custodial services: see M Leising and A Marsh, “Fidelity Is Said to Plan March Launch of Bitcoin Custody Service” (Bloomberg January 2019) at <www.bloomberg.com/news/articles/2019-01-29/fidelity-is-said-to-plan-march-launch-of-bitcoin-custody-service>; JP Morgan creates a digital token for its payment services, see <www.jpmorgan.com/global/news/digital-coin-payments>.

176 Basel Core Principles 2012, at Principle 8.

177 Borràs, S, “Analysing the Innovation Policy of the EU” in Borràs, S, The Innovation Policy of the European Union: From Government to Governance (Cheltenham, Edward Elgar 2003) ch 1, discussing innovation policy as initiated to deal with the rise of the “knowledge economy” since the early 2000s.

178 Schwab, K, The Fourth Industrial Revolution (Currency 2017).

179 Chiu, supra, note 2.

180 Described as sedimentary innovation, see Ford, C, Innovation and the State: Finance, Regulation, and Justice (Cambridge, Cambridge University Press 2018).

181 Above.

182 See HTC Hu, “Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency” (2015) 70 Business Lawyer 347 on the importance of learning in an objective manner the implications of innovation and disseminating for public education; S de Saille, “Innovating Innovation Policy: The Emergence of ‘Responsible Research and Innovation” (2015) 2 Journal of Responsible Innovation 152.

183 See <www.eublockchainforum.eu/about>.

184 E Sutherland, “Trends in Regulating the Global Digital Economy” (2018) at <papers.ssrn.com/sol3/papers.cfm?abstract_id=3216772>.

185 Borràs, S and Edler, J, “Introduction” in Borràs, S and Edler, J (eds), The Governance of Socio-technical Systems: Explaining Change (Cheltenham, Edward Elgar 2014).

186 Sundarajan, supra, note 57; A Killeen, “The Confluence of Bitcoin and the Global Sharing Economy” in Lee, supra, note 36, ch 24.

187 Explained in de Fillippi and Wright, supra, note 68.

188 One can also use Neil Fligstein’s economic sociology analysis to map the network analyses of actors and structures in new markets, see N Fligstein and R Calder, “Architecture of Markets” in R Scott and S Kosslyn (eds), Emerging Trends in the Social and Behavioural Sciences (2015) at <sociology.berkeley.edu/sites/default/files/faculty/fligstein/architecture%20of%20markets%20Calder%20Trends.pdf>, and earlier work Fligstein, N, The Architecture of Markets (Princeton, NJ, Princeton University Press 2001).

189 Sundarajan, supra, note 57; D Prabhat, “‘BorrowMyDoggy.Com’: Rethinking Peer‐to‐peer Exchange for Genuine Sharing” (2018) 45 Journal of Law and Society 84.

190 J Palomera, “Reciprocity, Commodification, and Poverty in the Era of Financialization” (2014) 55 Current Anthropology S105; also the “corruption” of objects that should not be subject to a market price, as argued by T Dagan, “Commodification without Money” (2010) at <ssrn.com/abstract=1537586>; Sandel, M, What Money Can’t Buy- The Moral Limits of Markets (London, Penguin 2013).

191 > Lee, J, Crypto Finance, Law and Regulation (Oxford, Routledge 2019) generally.

192 Also see OECD, Innovation Policies in the Digital Age (2017) at <www.oecd-ilibrary.org/docserver/eadd1094-en.pdf?expires=1556192035&id=id&accname=guest&checksum=97455A905BE124534E1626E271C575DD>.

193 S Borràs, “Analysing the Innovation Policy in the EU” in Borràs, supra, note 177, ch 1.

194 Mazzucato and Perez, supra, note 120.

195 M Benner, “Innovation Policy in Hard Times: Lessons from the Nordic Countries” (2012) 20 European Planning Studies 1455.

196 Borràs, supra, note 177, chs 1 and 7; also Biegelbauer, PS and Borràs, S, “Introduction” in Biegelbauer, PS and Borràs, S (eds), Innovation Policies in Europe and US: The New Agenda (Aldershot, Ashgate 2003).

197 OECD, Governance of Innovation Systems: Vol 2 (2005).

198 A Benz, “Combined Modes of Governance in EU Policy-making” in Tömmel and Verdun, supra, note 81, ch 3.

199 Borràs, supra, note 177.

200 Footnote ibid, “Introduction”.

201 See <ec.europa.eu/programmes/horizon2020/en>.

202 Borràs, supra, note 177, “Conclusion”, ch7.

203 de Saille, supra, note 182; and legalising an initiative of responsible innovation in the financial sector, see MT Casparri et al, “Responsible Financial Innovation in Banks: Committees of New Products” (2015) 19 Revista Científica “Visión de Futuro” at < www.redalyc.org/articulo.oa?id=357941099006> ISSN 1669-7634.

204 de Saille, supra, note 182.

205 S Borràs and J Edler, “The Governance of Change in Socio-technical Systems: Three Pillars for a Conceptual Framework” in Borràs and Edler (eds), supra, note 185.

206 S Kuhlmann, “Future Governance of Innovation Policy in Europe – Three Scenarios” (2001) 30 Research Policy 953.

207 Borràs and Edler (eds), supra, note 185.

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