What gives a fiat currency value

Crypto values, fiat money and aliens - a few notes on the MiCAR

At the end of September 2020, the European Commission presented a draft for “Regulation on Markets in Crypto-Assets”, or MiCAR for short. This is about nothing less than the regulation of crypto values ​​and their ecosystem in the EU, i.e. the publishers and service providers. For several reasons it is gratifying that it is not yet the final version, which - sporty - is planned for the end of the year. Because there are many content-related questions that have not yet been able to be resolved even after long discussions with experts and other nerds. In this blog, we will probably deal with the MiCAR more often in the coming months. In particular, the methodological approach leads to many problems.

MiCAR methodology from a bird's eye view

  • The central starting point of regulation is distributed ledger technology (DLT) or similar technology. It is worth noting that a certain technology is a prerequisite for the application of a finance law.
  • The subject of regulation are crypto values ​​based on this technology.
  • With regard to the regulatory requirements, a distinction is made between three types of crypto values: e-money tokens (EGT), value-referenced tokens (WRT) and other crypto values ​​(including utility tokens). EGT and WRT are referred to as "stablecoins".
  • The criteria for this trisection are based on properties of the respective crypto values, such as B. the fixed value (a single currency, currency basket, goods or other assets) and the use as a means of payment.
  • In principle, the regulation only applies to crypto values ​​that are not issued by a central bank or that do not fall under existing EU legislation in the financial services sector. However, this approach is not followed consistently because an exception is made with e-money.

This methodological approach has far-reaching consequences. If the MiCAR is passed in this version, there would therefore be (at least in theory) crypto values ​​that are legally classified as

  • Financial instrument,
  • E-money,
  • (Sight) deposits (including structured deposits),
  • Securitization,
  • EGT,
  • WRT,
  • Utility token or as
  • other crypto values

can be classified (see Art. 2). This works like a job creation measure for lawyers. The approach could only work if the above terms are or can be clearly defined and delimited from one another. In that regard, the draft is pretty weak on the chest. Therefore, fundamental questions arise, such as: B. under what conditions sight deposits that are managed as decentralized accounts on the blockchain are crypto values. Isn't this EGT? Is the term “tokenized deposit money” already used in the literature not a contradiction in terms? Can an account be a token at the same time? It gets even more complicated with e-money, since in Art. 43 of the MiCAR, the EGT is simply equated with conventional e-money, which creates a circular argument compared to Art.

Undefined fiat money

Even on the meta level “crypto values ​​versus fiat currency” there is a conceptual fog. In the draft, both superordinate terms are presented in opposite directions. The MiCAR only applies to crypto values ​​that are not fiat money. The MiCAR regulates, among other things. the exchange and redemption between the two types of money, the consequences of using one or more fiat currencies as a reference basis for the crypto values ​​and the use of fiat currencies to invest the funds received. Now, although a crypto value is being defined, you will look in vain for a legal definition of a fiat currency - despite its eminent role. The recitals are also silent on this.

The term fiat money has already been used in an EU legal regulation, namely in the 5th Anti-Money Laundering Directive (5AMLD). There are the opposite terms: Fiat Currency vs. Virtual Currency. Here, too, the definition of the fiat currency is missing. From the definition of the virtual currency (Art. 3 No. 18) one can derive what a fiat currency is:

a value that is issued or guaranteed by a central bank or public body, is necessarily tied to a legally defined currency and has the legal status of a currency or money.

In recital 8 of the 5AMLD, the following types of money are then subsumed under fiat money: legal tender (banknotes and coins) and e-money. Objection! What about deposit money (book money)? The legislature has simply forgotten that at this point. If e-money falls under fiat money, it definitely includes deposit money. Both types of money are ultimately tied to a legal currency for regulatory purposes. So fiat money = cash + deposit + e-money. At this point, a proposal for the legislature, who obviously does not dare to define fiat money so far: Instead of fiat money, simply use the term "amount of money", which in PSD2 (Art. 4 No. 25) contains exactly these three types of money.

In several places in the MiCAR, the term “fiat currency” is accompanied by the restriction “legal tender”. Example: In the case of an EGT, the reference basis is a fiat currency, but only if it is a legal tender (Art. 3 No. 4). As a rule, and in almost all countries, only cash is legal tender. How can a certain type of money be the reference basis of a crypto value in terms of value? Do you understand? Not me. The Commission presumably means: The reference base is a legally defined currency in which the legal tender is also nominated.

Objection from the ECB

In its current position paper on the MiCAR (dated February 19, 2021), the ECB rightly requested clarifications not only at this point. She discards the use of the term “fiat currency that are legal tenders” and instead suggests “official currencies”. We would have the ambiguous term “fiat currency” off the table, but not the sole reference to cash as legal tender, which makes no sense at this point. At this point, the ECB actually only means cash by “currency” (see footnote 16 of the ECB statement) and not currency in the sense of “currency”. Only with the last-mentioned interpretation would the matter fit again logically.

The ECB continues to criticize the very broad and technologically determined definition of the crypto value. In a footnote (12) it refers to a more suitable and precise definition for regulation, which the ECB uses in an Occasional Paper (No. 223/2019, p. 7):

"Any asset recorded in digital form that is not and does not represent either a financial claim on, or a financial liability of, any natural or legal person, and which does not embody a proprietary right against an entity".

Thus - according to the ECB - a crypto value would by definition not be a financial instrument, e-money, deposit money and central bank money (no matter in which form) and would be technology-neutral. The previously mentioned problems of demarcation with the MiCAR are therefore off the table. However, the ECB has decided not to implement this methodological suggestion in concrete amendments to the text. The text would probably have had to be rewritten in many places.

Are mutated stablecoins still stablecoins?

The methodical approach of the MiCAR and the proposed regulation of crypto values ​​lead to a strange circular conclusion, at least with e-money tokens. With this stablecoin, which by definition is only tied to a single legal currency, the regulatory requirements mean that, in the end, almost all the criteria for conventional e-money must be met. Art. 43 even says that EGT is considered to be conventional e-money. The stablecoin mutates into a fixedcoin with a required 1: 1 parity when exchanging and redeeming the respective currency. After the forced mutation, the legal currency no longer serves as a reference basis for value stabilization, but the crypto value itself - like giral and conventional e-money - becomes a digital representation of this currency. It would no longer use the EGT definition criterion "in which a nominal currency, which is legal tender, is used as a reference basis in order to achieve stable value " (Art. 3 No. 4).

By definition, extraterrestrials are not Earth inhabitants. But when the boys (m / f / d?) Have landed here and naturalized, they are no longer aliens. This is what happens to the domesticated EGT. At the end of the day it ends up in the fiat money warehouse.

You can also formulate it differently. According to Wikipedia, stablecoins are defined as follows: "Cryptocurrencies whose price is controlled by active or automatic monetary policy with the aim of low volatility in relation to a national currency, a basket of currencies or other assets". The first-mentioned category stablecoins (reference to a currency with a flexible exchange rate) will soon be banned under the MiCAR, at least in the EU. I am surprised that there has not yet been any uprising against the MiCAR within the crypto currency scene. For the second (currency basket) and third category (assets) - referred to as “value-referenced tokens” (WRT) in the MiCAR - it will be exciting to see what consequences the ECB's position will lead to for these stablecoins. It looks like the publishers of such crypto values ​​should also dress warmly.

P.S .: nominal currency? No thanks!

Where does the term fiat money come from? There are two interpretations of this term. The original one refers to fiat money as the opposite of commodity money. In this sense, we only have fiat money today: money with no intrinsic value. All cryptocurrencies are of course also fiat money. Now the crypto scene hijacked this term many years ago in order to mark the antipode of the anarchist crypto money creation: the money issued or controlled by the state. It was obviously successful because the opponents - the fiat money regulators - now also use this new second interpretation themselves.

In the German version of 5AMLD, the term “fiat currency” was translated as “fiat money”. In the MiCAR translation, the strange word composition "nominal currency" is now used for this. Not even Google can do anything with it and asks: “Did you mean nominal money and currency?” I don't know what the translators were thinking, but this new word creation is not acceptable. Since the respective genre only appears at the end of a word compound, the word currency money would be okay, but monetary currency would not.

Currency is always money, but money is not always currency. Just as there are polar and grizzly bears, there is also game, black and currency money, but no bear ice cream and no monetary currency. In addition, the word “nominal money” is out of place here, because it refers to the original interpretation of fiat money, in which - in contrast to commodity money - the nominal value is higher than the intrinsic value. My petition as a German with a migration background: For these reasons, the word “nominal currency” must not settle in the land of poets and thinkers. On the other hand, this creature would of course also have an advantage. A good search engine would only filter out the MiCAR and its comments in German when entering this non-word.



Cover picture: Copyright © Adobe Stock / Aliaksandr Marko