The European Union, often criticized for prioritizing regulation over innovation, points to Europe’s blockchain sandbox as an example of how regulation can spur innovation.

Following three confidential dialogue groups, the initiative developed a 230-page set of best practices report and attracted nearly 125 regulators and authorities.

The European Commission has tapped law firm Bird & Bird and its consortium partners to lead an initiative that connects blockchain operate cases with regulators to conduct confidential dialogues to resolve legal challenges.

Marjolein Geus, partner at Bird & Bird, told Cointelegraph that the trial showed that compliance does not have to be a deterrent.

“For use case owners, it helps them better understand the relevant regulations and how those rules apply to their projects,” she said. “It allows regulators and authorities to deepen their understanding of how these technologies interact with the regulatory framework in their areas of competence.”

In the latest cohort, “mature” operate cases were increasingly functional and embedded in sectors such as energy, healthcare and artificial intelligence, resulting in more intricate compliance discussions.

How MiCA became a test of regulatory timing for blockchain

When the Markets in Crypto Assets (MiCA) Regulation was adopted, observers warned that strict obligations would create barriers for startups. Stablecoin rules have come under particular scrutiny as Tether – the issuer of the world’s largest stablecoin – ultimately decided not to apply for MiCA authorization for USDt (USDT).

The brain drain narrative predates cryptocurrencies. European founders often incorporated into jurisdictions perceived as lighter.

Similar concerns arose when the General Data Protection Regulation (GDPR) came into force in 2018. Companies complained about interpretative ambiguities and administrative burdens. Some foreign companies have reduced their exposure to the EU. However, since then, GDPR has become a global reference point, with many multinational corporations adapting their operations to its standards.

The criticism the statement that Europe “regulates first, innovates later” is based on the assumption that legal certainty follows market development. MiCA was adopted before the cryptocurrency sector reached institutional maturity. Theoretically, such sequencing risks locking rapidly developing technology into immovable categories too early.

However, the sandbox presented a counterpoint, suggesting that early legislation combined with regulatory dialogue could enhance transparency and speed compliance. In the third cohort, 77% of respondents identified the sandbox as having a key or valuable impact on innovation and regulation, with none reporting any impact.

While the EU has opted for early codification and dialogue, the world’s largest economy, the United States, lacks a comprehensive federal framework for digital assets despite the president’s promises to become a global hub. Its proposed digital asset market transparency bill has stalled after key industry figures withdrew support for the legislation, including limits on the yield of stablecoins.

Related: When will the CLARITY Act framework for cryptocurrencies be passed in the US Senate?

Intelligent contracts and the limits of decentralization

While the best practices report covers more than 20 chapters covering multiple regulatory areas, its sections on sharp contracts and decentralization focus on the structure of blockchain systems at the code and governance levels.

“Virtually all DLT blockchain use cases use smart contracts. They are subject to regulation, with often security requirements as well as GDPR obligations,” Geus said.

The dialogue examined how these agreements interact with the existing EU framework, and not just MiCA. Depending on their function and the degree of control exercised by identifiable entities, sharp contracts may entail obligations ranging from cybersecurity source code reviews to operational resilience testing and compliance declarations.

“The question therefore arises how to ensure the security and compliance of these smart contracts with GDPR and how to check whether they meet the applicable regulatory framework. This is an area that requires further clarification, harmonization and standardization,” Geus said.

Another focal point of the third cohort report is the qualification of services provided “in a completely decentralized way, without any intermediary” under MiCA.

MiCA refers to the term “fully decentralized”, but does not define it.

Like sharp contracts, defining full decentralization in Europe requires further clarification. The report attempts to provide a checklist within the boundaries of the MiCA framework and the Markets in Financial Instruments Directive.

These include identifiable fee recipients or entities capable of modifying the protocol, which may suggest the existence of an intermediary. Where such influence exists, MiCA will likely apply and authorization as a cryptographic service provider may be required.

Related: Crypto’s promise of decentralization breaks down when it comes to interoperability

Crypto in the legal architecture of Europe

Participation in the European Blockchain Regulatory Sandbox does not imply legal endorsement or regulatory approval, nor does it constitute a derogation from applicable law.

In the third cohort, dialogues increasingly focused on horizontal regulations such as GDPR and the Data Act. Projects were assessed not as isolated cryptographic experiments, but as embedded digital systems interacting with financial, cybersecurity and data management frameworks.

Johannes Wirtz, partner in Bird & Bird’s financial regulation group, noted that regulators involved in the dialogues showed a deeper understanding of cryptocurrencies than expected.

“It was actually something that surprised me in some ways because it was always assumed that they were more or less old world, but they have their innovation departments that are really good at identifying problems,” Wirtz said.

If early criticism of European policy assumed that the law would limit experimentation, Bird & Bird representatives argued that structured dialogue clarified how this margin applied in practice.

Warehouse: Is China hoarding gold to make the yuan a global reserve instead of the dollar?