MEPs said that risks with an unregulated crypto market are not the blockchain technology but governance failures, calling for the rapid implementation of EU rules for crypto.
Discussing the FTX collapse on Wednesday, MEPs from the Economic and Monetary Affairs Committee highlighted governance flaws in the case, including a lack of an internal reporting mechanism and corporate controls, as well as no segregation between the company’s and clients’ assets. They also called for new EU rules on crypto-assets (MiCA) to be passed as quickly as possible and implemented diligently.
MEPs quizzed the European Commission and the European Securities and Markets Authority (ESMA) about whether a similar failure could happen under the MiCA. They also wanted to understand how FTX Europe could have operated from Cyprus under a MIFID license, which does not cover crypto transactions. Additionally, MEPs asked about cooperation with international partners and next steps at the global level.
The Commission representative said that under the MiCA both good governance and investor protection measures would be required and highlighted the fact that it was largely customers outside the EU that were affected as the FTX was a global crypto-asset conglomerate. To ensure EU protection is not crippled in a different jurisdiction, the Commission stressed the importance of global cooperation and pointed to their work advertising MiCA to global fora such as G7 and bilaterally with the UK, Canada and Korea.
The ESMA speaker explained that as the MIFID licence in Cyprus fully covered MIFID services and transactions but was not suitable for crypto assets, it was suspended by Cypriot authorities on 9 November. He agreed that despite many problems in the crypto-assets market, such as market abuse, lack of control and aggressive advertising to retail clients, the crypto industry is still not properly supervised. There is however cooperation between the ESMA crypto assets task force and national authorities on a case by case basis, in order to allow for more harmonised supervision and a warning system. Additionally, ESMA issues warnings to investors on the severe risks posed by a crypto asset. The ESMA speaker stressed that there is no significant risk of major spillover to traditional financial sector.
Finally, taking into account volatility on crypto markets and the market’s rapid changes, MEPs discussed whether MiCA has enough firepower to deal with crypto conglomerates, and what regulatory tools can address current threats before the law enters into force in 2024. They also urged the ESMA to use where possible its product intervention powers to block certain crypto products threatening the single market and investor protection in the EU.