Derville Rowland: Industry briefing on Markets in Crypto-Asset
Regulation
Remarks by Ms Derville Rowland, Deputy Governor of the Central Bank of Ireland, at
the Industry Briefing on Markets in Crypto-Asset Regulation (MiCAR), Dublin, 18 July
2024.
* * *
Welcome and intro
Good morning, and I am delighted to welcome you to the Central Bank of Ireland today
for our Industry Briefing on MiCAR. To date, our engagement with the crypto sector has
been delivered through meetings with industry associations, through bilateral
engagements with you as individual firms, through speeches and through updates to
our website. Today marks the first time we have brought so many of you together to
discuss our regulatory approach towards the crypto sector. I hope you find the briefing
and discussion useful.
Recent years have seen tremendous innovations in financial services. Amongst the
most notable have been the development of blockchain-based technologies. In 2020,
the European Commission introduced its digital finance package, including a digital
finance strategy and legislative proposals on crypto-assets and digital resilience.
The package reflected the EU's ambition to embrace a digital transition, to help
modernise the European economy across sectors, and to turn Europe into a global
digital player. Here we are almost 4 years later ready to implement the Markets in
Crypto-Asset Regulation, or MiCAR, as it has become known across the European
Union.
MiCAR is a very important step forward in the regulation of crypto activities in Europe
while also leading the way on the regulation of the crypto sector globally. For the first
time, the EU will have a harmonised regulatory framework for this sector that introduces
prudential and conduct obligations for issuers of e-money tokens, asset-referenced
tokens, and for crypto-asset service providers. There are also obligations for offers to
the public of crypto-assets other than asset-referenced tokens or e-money tokens.
While the journey for the crypto sector to this point has been interesting, it has also
experienced challenges in terms of culture and conduct leading to problems for
consumers.
In particular, we in the Central Bank are keen to ensure consumers have clarity around
risks when they make financial decisions. With this in mind, our "5 things you need to
know about buying crypto" campaign launched earlier this year aimed to create an
understanding amongst the public about the risks of buying crypto.
I am hopeful that MiCAR and the regulatory focus it facilitates, will contribute towards
building a better culture within the crypto sector, a culture where consumer protection
and good governance is at the heart of all decision making, which will ultimately
strengthen the industry and the firms operating within.
The Central Bank's focus on technological innovation
It is difficult to overstate the profound impact that technological innovation has had on
the provision of financial services over the past decade.
Most relevant for today is how we can see the many areas where the blockchain has
significant potential to bring about positive change, even transformation, in how we do
things. Whether this be tokenisation of investment products or improvements in
posttrade infrastructure and interoperability, there are important positive stories to tell.
As such, it comes as no surprise that technological innovation is an important focus of
attention for us here at the Central Bank. While innovative firms can provide significant
benefits to consumers and the wider marketplace, and we very much welcome this, our
objective is to ensure the regulatory environment enables the potential benefits of
innovation for consumers, businesses and society to be realised, while the risks are
effectively managed and mitigated.
The growth of digital assets
While Mary-Elizabeth McMunn, Director of Banking, Payments and Credit Union
Supervision, and the panel members will delve into the specifics of our
authorisation and supervisory expectations in the case of MiCAR, I do want to touch
on the Central Bank's view around the risks and culture associated with the crypto
sector.
We have a mandate to protect consumers and it is at the heart of what we do. When
we consider new innovations, critical to us is how these innovations deliver for
consumers. As such, when regulators are asked to engage with a product or a firm, the
very first thing that we will want to understand is its purpose, its use, or, in the case of a
firm, its business model. This is our starting point.
This is particularly important to highlight when it comes to the products and services in
the crypto ecosystem, as the crypto sector will be moving into the regulatory sphere for
the first time.
The potential for crypto and blockchain to build financial inclusivity or democratise
finance has long been a theme of discussion in the sector. Crypto enthusiasts speak
readily to how crypto and blockchain technologies, paired with global internet access,
can provide easy and immediate access to people across the world to financial services
and achieve a level of financial inclusivity that the traditional financial services cannot.
While this is an exciting prospect, it cannot be achieved without guardrails.
Consumer and investor protection begins with firms themselves. For the crypto sector
to succeed, compliance and a customer centric approach should not be seen as a cost
of doing business, but rather, they have the potential to be a competitive advantage.
The provision of financial services is about helping others make financial decisions; it is
also about the provision of choice for consumers and importantly, the provision of
products that are suitable for consumers. Selecting financial services or financial
products often involves taking risks. The stronger the firms risk management, the better
position they are in to understand, calculate and mitigate risks, therefore strengthening
their business model, and their relationship with their customers.
The importance of good culture and conduct risk management in delivering on new
obligations under MiCAR cannot be overstated. It is not merely a regulatory
requirement; it should be viewed as a fundamental component of maintaining trust,
integrity and stability within the sector.
Effective organisational culture builds on shared purpose and standards such as
professionalism, honesty, integrity and accountability to deliver fair outcomes that have
the interests of consumers and investors at heart.
The Central Bank expects to see such standards and values embedded in all the firms
we regulate. The importance of tone from the top, and the critical role of directors,
cannot be overstated. The directors have a role in setting the culture, living by it
themselves and calling out and addressing poor behaviours when observed. This will
ensure that when they are faced with a dilemma or a moment of pressure, their natural
instinct is to do the right thing, not the questionable thing.
The value of guardrails
Our mission requires us to ensure that the financial system operates in the best
interests of consumers and the wider economy. Consumer and investor protection risks
are inherently high in some crypto and services and this is a concern to us. This is why
we have warned consumers that crypto products can be highly risky, speculative and
are not suited for most retail consumers. Where we see higher inherent conduct and
consumer protection risks in products, we will have higher expectations of firm's to
adhere to high standards.
So in short, we take a sceptical view on business models where profitability is driven
from the heavy marketing, offering and distribution of unbacked crypto to retail
customers for speculative purposes.
Additionally, I would also like to stress that governance and safeguarding of client
assets are critical considerations for the Central Bank. Regardless of the services, the
target customer base, or whether it is retail focused or aimed at institutional clients,
governance and safeguarding of client assets are key in shaping our view of risk.
The role of regulation and our work at an EU level
The intention of MiCAR is to address the risks to consumer protection and market
integrity from crypto, along with specific risks to financial stability and monetary policy,
while also bringing regulatory clarity to the sector. It will provide a consistent framework
across the EU for the on-going development of this innovation, and bring much needed
legal clarity to the market. Importantly, we expect MiCAR to be an iterative process
that will be tailored over time to address emerging activities and risks in the crypto
sector.
A priority for the Bank has been working with our EU peer regulators and the European
Supervisory Authorities (ESAs) to ensure the necessary coordination and consistency
across Europe as we implement MiCAR across the 27 jurisdictions of the EU. This work
is focused on completion of the level 2 and level 3 texts, the more detailed regulations,
technical standards and guidelines. The ESAs have sought and continue to seek
stakeholders' input on the proposed level 2 and level 3 texts through their consultation
processes. I would encourage you to engage with these remaining processes in order
to convey your observations and insights.
Crucially, this European work is focused on driving a convergent approach to the
implementation of MiCAR in authorities authorisation and supervision processes. We
see this as crucially important throughout the MiCAR implementation phase and
beyond. It will ensure clarity and consistency for industry and regulators alike, aiding
firms in their approaches towards transitioning to MiCAR. Importantly, it will help
prevent arbitrage or jurisdiction shopping based on actual or perceived differences in
approach. This should ensure a strong grounding for this new important regulation.
Our purpose today
So finally, this brings me to our purpose today.
Today, we are seeking to engage with you as a sector, to facilitate an open and
constructive engagement that enables us to outline our approach to implementing
MiCAR, and for you as an industry to have greater clarity and transparency on the next
steps.
Over recent years, we have been working to continually improve our authorisation
process. Through engagement with industry, other public bodies and applicants, we
have sought to better explain our expectations, resulting in increased clarity and
predictability. Better risk assessment, better communication and better supervisory
outcomes have been the output of that work.
We have produced new publications, enhanced our internal processes and responded
to the changes in the authorisation landscape, including the increase in the number of
complex applications. You can expect that continuous improvement and innovation to
continue.
So today, we want to:
Outline our approach to implementing MiCAR;
Inform you of our risk appetite;
Clearly communicate our authorisation and supervisory expectations; and
Set out potential next steps, specifically when our MiCAR gateway engagement
will open.
Lastly, we want to hear from you.
Following Mary-Elizabeth's remarks, we will have a panel discussion and welcome your
questions. I know some of you have already submitted questions via email that you
would like us to address today. We will do our best to answer your queries today, but if
not possible, the Central Bank will be engaging bilaterally with you over the coming
months. With this said, I would again like to welcome you to the Central Bank and I
look forward to your engagement today. I hope that this briefing session is informative
and helpful and provides you clarity on the next steps that you may take regarding your
MiCAR journey.
Mary-Elizabeth McMunn will now tell you more about the plans for the session
Thank you.