EU concerned about crypto rules after FTX explosion

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The collapse of Bahamas-based crypto exchange FTX has sparked a new debate in Europe about whether regulations on block digital assets are up to the job of protecting the public from similar calamities.

The spectacular FTX implosion in November further destabilized a market already reeling from an unprecedented crash this summer. Several once-important companies went bankrupt after a 70% drop in crypto token prices, adding urgency to efforts by global policymakers to tame an industry widely described as the Wild West of finance.

Although FTX is based in the Bahamas, the repercussions of its collapse are shaping the debate over how best to regulate the crypto industry in Europe.

The EU already has an extensive set of rules, known as the Crypto Asset Markets Regulation, due to come into force in 2024. It has been described as the world’s most comprehensive regulatory package for crypto . Prominent names, such as Binances Managing Director Changpeng Zhao, have said that Mica could become a global industry standard.

However, the fallout from FTX, which at one time was widely considered one of the most reputable brands in the industry, has left pundits and policymakers wondering if Mica, which has been on the drawing board since 2018, will be up to the task of protecting Europe from future cryptography. implode.

On Tuesday, UK City Minister Andrew Griffith told the Treasury select committee that Mica was a good attempt at regulating cryptocurrencies, but that it only covered some of the areas the UK would seize upon when he would publish his own plans in the coming weeks. The UK regime would be more nimble in how it deals with emerging crypto issues, he added.

European Banking Authority Chairman Jos Manuel Campa, whose office will oversee large tokens under the new European rules, told the FT that while Mica was the best there was, he admitted that he there were definitely blind spots in the package.

We need to be clear about what is regulated and what is not, Campa said, adding that EU policymakers are concerned about stock exchanges operating from non-EU states accessing the block customers.

When asked if they were concerned about the risks to European consumers who might choose to interact with offshore crypto firms, a European Commission official told the FT: If consumers decide they want to deal with someone who is established outside the EU and knowingly transacts with these entities, well they are on their own, there is not much we can do for them.

The Financial Stability Board, which oversees global crypto regulatory policy, said the FTX collapse has highlighted several areas that need further work, including how to deal with companies that combine a variety different activities such as trading, lending, clearing and custody. Traditionally in financial services, these functions are separated. The FTX explosion has also heightened urgency around the global crypto framework the FSB is working on.

Meanwhile, Mica is drawing criticism from some European lawmakers. I have serious doubts that Mica would have prevented what happened, Spanish MEP Ernest Urtasun told a hearing organized by the European Parliament’s Economic and Monetary Affairs Committee in late November.

Under Mica, crypto companies would only need permission from a national authority to offer services across the EU under the block passporting rules for financial services.

This means that consumers in the European single market are potentially exposed to a weak link in the regulatory chain. FTX which held a license in Cyprus via a subsidiary only added to these fears.

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Whether [the Cypriot subsidiary] even remotely behaved like its parent company, this raises major questions about the quality of financial services supervision in Cyprus, said German MEP Markus Ferber. Finnish MEP Eero Heinluoma added that the success of Mica would mainly depend on proper enforcement and monitoring by national authorities.

Still, Campa said there are still positive lessons to be learned from FTX’s demise. Despite the catastrophic collapse of one of the industry’s largest entities, there was little evidence to suggest that the industry’s volatility posed stability risks to the broader financial system.

It has exploded and there is no risk to financial stability, Campa said, adding that he now feels more confident about the challenges of crypto regulation than before the recent failure of several companies in the space.

Underlying issues such as glaring compliance gaps are the kind of issues so well addressed by normal regulation, he said.

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