The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any other regulatory authority of any State or other jurisdiction of the United States or Canada and (i) may not be offered, sold or delivered within the United States or Canada, or to, or for the account or benefit of any U.S. Person or Canadian, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons and Non-Canadians.

November 28, 2023

2024 trends: DeFi under MiCAR; Bottlenecks; RWA products on chain

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments.


This week we’re providing some trends to keep in mind as we wrap up this year and head into 2024:

  • Hunting for MiCAR clarity on decentralization
  • MiCAR could create major bottlenecks 
  • Corporate financial products to move on chain


Clarity for decentralization in MiCAR


As we enter 2024 the debate over the regulatory position of decentralized finance is going to amplify. 


This is thanks to the competing interests of regulators and project participants, whose purviews often continue to be opaque, despite a developing regulatory landscape. 


Project creators are looking to work within existing frameworks or adapting to new approaches, but any lack of a clear guiding hand from regulators can create uncertainty. However, there could be some clarity in the pipeline for DeFi-focused projects in the wake of MiCAR. 


While there are still some relatively complex nuances, according to the legislative language set out in MiCAR, European regulators will not have regulatory oversight over applications that are sufficiently decentralized. At the BaFinTech conference 2023, the German regulator confirmed this position and stated sufficient decentralization of DeFi infrastructure leads to no oversight of it and it is, for all intents and purposes, unregulated. This is a potentially interesting incentive. 


In essence, truly permissionless DeFi requires no regulation because the code makes it self-regulating. It is completely inclusive and automated without the need for a middleman. Essentially in the view of the regulator it is this middlemen they have the purview to oversee. If they aren’t there, then there’s no requirement for oversight and activity is conducted in a totally decentralized manner.


Rather than preventing such a development, the onset of MiCAR has enabled and motivated truly decentralized exchange to fruition, as this is the logical end result of the process. This could be one of the key trends to watch in 2024, particularly as the sector settles onto the regulatory frameworks that have been established in the past few years. 


In order to exceed those frameworks, truly permissionless decentralized finance could soon be making waves where the old centralized exchanges failed. 


MiCAR bottlenecks coming in 2024


There is a specific issue on the horizon that will begin to affect providers, as we move toward full implementation of MiCAR – the bottleneck of MiCAR applications.


Only general guidance for how companies can be compliant with MiCAR has been issued and this has not been clearly defined by local EU regulators. While there will be a shortened process for previously licensed companies, the current outlook for this lacks details and committed time frames, which is unhelpful to those looking to be fully compliant in good time. 


In our view, an optimistic assumption would be for this outlook to become available by mid 2024, with the expectation that applicants will have to finalize compliance by 1 January 2025. 


This is an extremely truncated timeline to consider and has the potential to create a major bottleneck as firms attempt to gain authorization ahead of the deadline, considering the expected application volumes and our past experiences. 


It would be good for the process to be outlined clearly and as quickly as possible in the new year, otherwise companies could find themselves in a race against time to meet the deadline for implementation. Unfortunately regulators have an, at times, ponderous approach to the implementation of the new framework.


More corporate financial products will move on chain 


Finally, a shoutout to Simon Seiter from Bank Hauck Aufhäusser on tokenization at the recent BaFinTech conference 2023: he called for a “Just Do It” mentality rather than getting stuck on forming new standards and committees while the market is so young.


We like this mindset, especially now at such a critical time for the sector. Tokenization has the potential to totally change the face of financial services – so now is the time for the sector to get on and “just do it”. We’re seeing the green shoots of this movement in financial assets take place, with growth in both tokenized stocks and bonds already well underway. 


2023 provided the foundation for tokenization to happen where we saw government-issued bond products move on chain. 2024 will see the likes of more corporate products moving on chain, like money market funds that are increasingly being tokenized. 


There is a massive ecosystem of TradFi assets out there waiting to come on chain. We believe 2024 will be the year when major corporate financial products, assets and other instruments begin to truly shift in a wholesale manner onto blockchain infrastructure.