What you need to know about crypto assets
This week, MEPs decided on Parliament’s position on a regulation for crypto assets. But what IS a crypto asset? How does the crypto market work? Time to take a closer look…
Crypto assets are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptography is like a secret code that people use to keep their messages private.
The most well-known crypto asset is Bitcoin, but there are now thousands of other types of crypto assets, including Ethereum, Binance Coin, and Dogecoin. If you have a bitcoin, what you really have is a secret digital key. This key allows you to prove to others on the network that you own a certain amount of bitcoin. When you use that bitcoin, you let everyone on the network know that you have transferred ownership of it, and you prove that it’s really yours by using the same key. Your key is kind of like a password that lets you access your money, but you can’t reset it if you lose it. If someone else finds your key, they can take control of your bitcoin, and you won’t be able to get it back.
The history of all the bitcoin transactions is stored in a permanent record called the “blockchain”. This record shows who owns each bitcoin and cannot be changed. Everyone can see the information in the blockchain. Then there are stablecoins. Stablecoins are a cryptocurrency as well, but they are “pegged” to something else that’s more stable, like a real currency. That means the value of the stablecoin is always worth around the same as the thing it’s pegged to. So if a stablecoin is pegged to the US dollar, one stablecoin will always be worth about the same as one US dollar.
So much for the technical side.
While crypto assets can be used for transactions like traditional currency, they have also become a popular investment vehicle.
Crypto assets are soaring in value.They have become the latest toy in an economic system where everything can be monetized and turned into a commodity. Take NFTs – non-fungible tokens: They give the owner exclusive ownership over a digital object. This object can be virtually anything, including images, songs, tweets, and even virtual real estate. One B-list reality star has even gotten in on the action by monetizing her own farts.
Crypto assets are an ecological disaster.
The impact on the environment caused by the creation and use of cryptoart and cryptocurrency is massive. Citibank calculated that the bitcoin network will eventually consume roughly the same amount of electricity as Japan. Even though some measures can be taken to reduce the energy cost, the fundamental value system of the crypto market ties the worth of digital assets to the physical resources that are expended in their creation. This relationship cannot be eliminated, regardless of how cheap it becomes to create tokens or how much renewable energy is used in the process. Cryptocurrency is never going to be ecologically just.
“Crypto-assets are bringing about instability and insecurity – the exact opposite of what they promised. They are creating a new Wild West”, says Fabio Panetta, Member of the Executive Board of the European Central Bank. It is hard to make a case for the actual use value of crypto assets. Like the very dumbest pyramid schemes, they’re best understood as speculative investments in which a privileged few can wring money from something of no redeeming social benefit.
Lately, crypto assets have garnered a lot of attention due to their volatile nature and how they have existed in an unregulated space. In return, the European Commission proposed a Markets in Crypto Assets (MiCA) regulation to cover all crypto, including stablecoins. This week, Parliament voted on the outcome of lengthy negotiations between the Commission, Parliament and the Council. However, with regulation, comes the question of whether the EU is bringing respectability to a shady sector.
During the process, the crypto industry ramped up its lobbying campaign to prevent EU legislators from developing tougher rules. The third wealthiest crypto billionaire, Brian Armstrong, called the regulation an anti-privacy surveillance regime – what else would you expect from someone who demands his employees refrain from political discussion at work?. The day before the vote in Parliament, Armstrong extolled the benefits of the crypto industry in a half-page ad in the Financial Times.
Sad but true, while the final compromise is weak it still represents a major improvement from the status quo and from the Commission proposal.
MEP Chris Mac Manus (Ireland, Sinn Féin) followed the process all the way. Shortly before the final vote in plenary, Chris urged for a strong regulation which could boost transparency, protect consumers and aid financial stability. “I have zero interest in creating a market for – or in fostering the use of – crypto-assets. At their worst they are pyramid schemes, they are used by criminal gangs for money laundering and to defraud working people and they can waste huge amounts of energy for no purpose. In short, I see little or no social or economic benefit to these tools of speculation. I accept the reality that these crypto-assets exist and therefore, short of banning them, they must be regulated”, he explains.
The Conservatives in Parliament managed to scrap the limitations on energy consumption and environmental protection safeguards in the regulation. Co-chair of the Left Martin Schirdewan (Germany DIE LINKE) condemns the many missed opportunities to hedge the crypto industry, saying that “the result resembles a declaration of surrender to the power of Bitcoin corporations. The right thing to do would have been to completely ban the energy- and resource-wasting production of crypto assets. Speculation with Bitcoin and Co. should be strictly separated from traditional financial transactions.”
Portuguese MEP Jose Gusmao (Bloco de Esquerda) slams the regulation, calling it outdated, inefficient and inadequate. Making matters even worse, this new regulation “gives public credibility to an industry that relies on “play money”, Gusmao adds. “But the fact that crypto-activities are play money doesn’t mean they don’t have serious consequences. The link between the crypto-active market and the conventional financial system is growing, and more and more households are giving real money in exchange for toy assets.”
There is no need to worry about the bad result of the regulation though. Given that the crypto industry is growing exponentially, any law that the European Parliament might propose now would take years to implement, making it essentially obsolete.
Understanding that a system based on greed will always produce harm is the starting point to shape policies that do serve the people, not profit.