The collapse of Bahamas-based crypto exchange FTX has sparked fresh debate in Europe about whether the bloc’s digital asset regulations are up to the job of protecting the public against similar calamities.
FTX’s spectacular implosion in November further destabilised a market that had already been left reeling after an unprecedented collapse in the summer. Several once-prominent firms went bankrupt after a 70 per cent drop in crypto token prices, injecting urgency into global policymakers’ efforts to tame an industry widely described as the “wild west” of finance.
Although FTX was based in the Bahamas, the reverberations of its collapse is shaping the debate about how best to regulate the crypto industry in Europe.
The EU already has an extensive set of rules, known as the Markets in Crypto Assets 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 Binance’s chief executive Changpeng Zhao, have said Mica could become a global standard for the industry.
However the fallout of FTX — which at one time was widely considered one of the industry’s most reputable brands — has left experts and rulemakers questioning whether Mica, which has been on the drawing board since 2018, will be up to the task of safeguarding Europe from future crypto implosions.
On Tuesday, the UK’s 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 capture when it publishes its own plans in the coming “weeks”. The UK’s regime would be “more agile” in how it dealt with emerging crypto issues, he added.
Chair of the European Banking Authority José Manuel Campa, whose office will be responsible for supervising “significant” tokens under Europe’s new rules, told the FT that while Mica was “the best that’s out there”, he admitted there were blind spots in the package “for sure”.
“We need to be clear about what’s regulated and what’s not,” said Campa, adding that EU policymakers had concerns about exchanges operating from non-EU states accessing customers in the bloc.
When asked whether they were concerned about the risks facing European consumers who might choose to interact with offshore crypto firms, one European Commission official told the FT: “If consumers decide that they want to deal with someone who is established outside the EU, and knowingly transact with those entities, well then they are on their own, there isn’t much we can do for them.”
The Financial Stability Board, which oversees global policy on crypto regulation, has said FTX’s collapse highlighted several areas for additional work, including how to deal with companies that combine a variety of different activities such as trading, lending, clearing and custody. Traditionally in financial services, these functions are kept separate. The blow-up of FTX has also increased urgency around the global crypto framework that 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,” said Spanish MEP Ernest Urtasun during a hearing held by the European parliament’s economic and monetary affairs committee in late November.
Under Mica, crypto companies would only need authorisation from one national authority to offer services across the EU under the bloc’s “passporting” rules for financial services.
That means the consumers across Europe’s single market are potentially exposed by one weak link in the regulatory chain. FTX — which held a licence in Cyprus through a subsidiary — has only worsened these fears.
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“If [the Cypriot subsidiary] even remotely behaved like its parent company, this raises major questions in relation to the quality of financial services supervision in Cyprus,” said German MEP Markus Ferber. Finnish MEP Eero Heinäluoma added the success of Mica would “mainly depend” on proper enforcement and follow-up by national authorities.
Still, Campa said there remained positive lessons to take away from FTX’s demise. Despite the catastrophic collapse of one of the industry’s biggest entities, there was little evidence to suggest the industry’s volatility presented stability risks to the broader financial system.
“It’s blown up, and there is no financial stability risk,” Campa said, adding that he now felt more confident about crypto regulation challenges than before the recent failure of several companies in the space.
“Underlying problems” such as glaring gaps in compliance were the kind of issues “so well captured” by normal regulation, he said.
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