Response to consultation on Guidelines on recovery plans under MiCAR
Q1. Is the approach to the application of the principle of proportionality adequate for the purposes of recovery planning?
Partially, yes. It’s important to note that when taking into account the significance and risk profiles of DLT networks, it should also include a comprehensive risk analysis of the public blockchains (assuming these are the chosen DLT networks) and their crypto-assets and ongoing monitoring of such risks. This is because, to me, this is a critical risk that must be properly addressed. Public blockchains go hand in hand with their cryptoassets, and the validators/minors of such blockchains can operate anywhere in the world globally. The level of decentralization is not the same on every public blockchain, and this level can easily change. Also, other properties, like blockchain speed, vary per blockchain. While sustainability is, to some extent, important in any public blockchain, it is definitely not the most important factor to differentiate the risk of a public blockchain, which, in essence, is a payment network. For example, the Luna blockchain (from the Terra ecosystem) had great sustainability; however, it was a rubbish blockchain. Governance is also a significant factor in some public blockchains, especially in all the more sustainable (those with proof of stake) blockchains, because many of these blockchains are run by a bunch of groups of people with consensus mechanisms that have much room for improvement. A risk score/rating for the public blockchain and its respective crypto-asset that is assessed and monitored by independent parties could help with this.
In addition, you might want to add “the proper risk assessment of crypto-assets, when they are used as the reserve for an asset-reference token” to the criteria of proportionality. Ideally, the proper risk assessment of the crypto-asset should be based on a comprehensive and relevant risk framework that evaluates every risk parameter/factor (e.g., level of decentralization, governance, platforms/companies associated, etc.) of the crypto-asset. A risk score/rating for such a crypto-asset that is assessed and monitored by independent parties could help with this.
Q2. Do you have any comments on the need to exchange information between the issuer and the relevant third party provider to avoid delays in the activation of the recovery plan in case the issuer has entered into an agreement pursuant to point (5)(h) of Article 34 of Regulation (EU) 2023/1114?
I agree that a clear and detailed description of the processes established to exchange information is needed.
Q3. Do you have any comments on the categories of recovery plan indicators and on the recovery plan indicators listed in Annex I? Is the list of categories and recovery plan indicators clear? Is there any additional indicator or category of indicators that should be added?
Yes. I believe for the operational risk indicators, as the permissionless blockchain (e.g., public blockchain) is one of the main reasons we have the MiCA regulation, the risk associated with permissionless blockchains must be thoroughly assessed. As mentioned in answer to "Question 1", I believe there should be a requirement that a third independent party assesses and monitors the risk of the permissionless blockchain (e.g., public blockchain), which is interlinked with its crypto asset (e.g., the Ethereum blockchain can not exist without its crypto-asset ETH). Maybe a rating/risk score that is monitored on an ongoing base should be required as an operational risk indicator.
Public blockchain's consensus mechanisms can be very different (some better than others). Also, public blockchains have all kinds of organizations, foundations, software developers, and key stakeholders (like investors during the ICO phase) involved (because anyone from the public can get involved), and they can be located anywhere in the world (this is particularly the case for the minors/validators). From a technology and governance perspective, these public blockchains don't have a standard they follow (e.g., you can have all types of proof of stake).
Also, other properties, like blockchain speed, vary per blockchain, and while sustainability is important in any public blockchain, it is definitely not the most important factor to differentiate the risk of a public blockchain. For example, the Luna blockchain (from the Terra ecosystem) had great sustainability; however, it was a rubbish blockchain, and hence, you would never want to use it as a payment network for stablecoins. Governance is also an extremely important factor in some public blockchains, especially in all the more sustainable blockchains (those with proof of stake), because many of these blockchains are run by a bunch of groups of people with consensus mechanisms that have much room for improvement.
In addition, as another recovery risk indicator, you might want to add “the proper risk assessment of crypto-assets” when they are used as the reserve for an asset-reference token”. Ideally, the proper risk assessment of the crypto-asset should be based on a comprehensive and relevant risk framework that evaluates every risk parameter/factor related to the particular crypto-asset where there is a risk framework per type of crypto-asset. Again, maybe you should require obtaining such risk assessment/risk scores/risk rating for a crypto-asset from an independent third party that has already the expertise to do so.
While EBA might be of the view that it is key that issuers consider circumstances where the market price of the token is different than the market price of the referenced asset(s), history has proven that there is usually misinformation, and only those with the best information can always understand the risks of assets better than the masses and that the market prices of assets don’t move/react until it’s too late. For example, let’s say I create an asset-reference token called NewTerra that has two crypto-assets as collateral. One crypto-asset is like Luna (a crypto-asset that supposedly was native to the Luna blockchain), and the other crypto-asset is called Tulip (a crypto-asset that gives you discounts to buy Tulips from the Netherlands). Let’s say through price manipulation, the market prices of Luna and Tulip are pushed up to $500 million each. Then, based on that, I create NewTerra (an ART with 50% of Luna and 50% of Tulip as collateral) so that $1 NewTerra has $0.5 Luna and $0.5 Tulip as collateral. Then hedge funds that did the proper risk analysis would figure out it is not possible for the Luna to be worth $500 million in market cap and for Tulip to be worth $500 million in market cap, so they short NewTerra massively and waited until finally the rest of the world becomes aware of this and the price of both Luna and Tulip go to almost zero in one to two days (the only ones that make money in this scenario are the hedge funds, while the consumers are the one that lose). Hence, when the reserve asset assets are crypto-assets, it’s very important that the proper risk analysis is done. This is why if crypto-assets are used as collateral, there should be a third-party assessment of the riskiness of such crypto-asset, and a haircut (e.g., 30%, 40%, 50%, 60%, 70% haircut based on the risk score/rating/risk assessment of the crypto-asset) needs to be taken based on that and not use some simplistic mathematical formula for the over-collateralization as written in the Draft Regulatory Technical Standards to specify further the liquidity requirements of the reserve of assets under Article 36(4) of Regulation (EU) 2023/1114. Not having the proper risk analysis and over-collateralization for crypto-assets used as collateral of ART (asset reference tokens) is a disaster waiting to happen.
Q4. Is the section on recovery options and recovery scenarios appropriate and sufficiently clear, also when read together with Annexes II and III?
Yes
Q5. Do you have any comments on the interaction between different recovery planning obligations? Are there any other operational efficiencies that can be achieved? Please describe them.
No