The European Central Bank’s head of financial supervision has warned regulators will struggle to oversee crypto asset providers, which “never think about financial risks”, do not respect national borders and pose “a huge consumer protection issue”.
Andrea Enria, chair of the ECB’s supervisory board, told the Financial Times: “I am concerned for my colleagues that will have to perform this supervision in the future because these are animals with whom it is difficult to engage.”
Global regulators have been scrambling to respond to the collapse of crypto exchange FTX, which filed for bankruptcy in the US on Friday after failing to fill an $8bn funding shortfall and leaving customers around the world facing heavy losses.
FTX’s collapse has delivered a powerful blow to a crypto industry already reeling from a string of failures in the sector this year, including the TerraUSD stablecoin and crypto lenders Celsius Network and Voyager Digital.
The EU is finalising legislation to bring crypto asset providers under a regulatory framework for the first time, known as Markets in Crypto-Assets, which will replace a patchwork of national rules. Enria said he was proud that the EU was the first jurisdiction to “bring these entities under some form of supervision” but predicted it would be an “interesting challenge”.
“When you’re talking about risk management with them, they have a different mindset,” he told the FT at a Dutch central bank event last week. “They think of IT security only; they never think about financial risks, so I don’t know how our toolbox will work with these types of animals.”
One of the biggest problems confronting regulators was the difficulty in pinning down where many crypto asset providers were based, Enria added. “Our tools are focused on legal entities and on territories,” he said. “Both issues with these crypto asset providers are not there.”
FTX’s public disclosures have revealed a multi-jurisdictional web of wholly owned subsidiaries and intercompany loans including entities in the Bahamas, Cayman Islands, Antigua and Barbuda, as well as the US, Japan, Germany and Switzerland.
In Europe, FTX secured a licence to operate as a Cyprus investment firm in September after acquiring a Cypriot rival K-DNA Financial Services that allowed it to operate across the EU, but the local regulator suspended this authorisation on Friday.
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FTX’s main rival Binance eschewed having any identifiable headquarters for years, but it recently secured oversight in several jurisdictions including a registration in France and a licence in Dubai.
Enria said one leading crypto asset provider had threatened to route more of its European customers’ trading via its offshore entities if incoming EU regulation tried to force it to provide much more euro-denominated issuance.
“They said ‘This is unreasonable, it should be changed. But, eventually, if you don’t change, we will provide European customers with the same type of dollar-denominated assets via the internet through our shop in some other jurisdictions’,” he said. “It will be very difficult to police these types of requirements.”
The crypto market is “still not big enough to really generate a financial stability concern right now”, Enria said, but he added that “banks will need to engage in some way or another” with the crypto world.
He added: “The investments which are most exposed to these kinds of providers of crypto assets are the weakest parts of the population; the less wealthy, the poorer, the minorities. That is a concern, that is an important challenge for the consumer protection authorities.”
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