Cracks Appear in Regulation as EU Delays MiCA

What a difference a week makes.

It was only on Nov. 2 that Coindesk exposed the ties between FTX and Alameda Research, the crypto exchange and trading firm both owned by Sam Bankman-Fried.

But within days, the realization Alameda’s wealth rested on FTT tokens — essentially a cryptocurrency its sister company conjured out of thin air — led to what is being called the crypto equivalent of a bank run.

As the industry woke up on Wednesday (Nov. 9) to the news that it has been dealt yet another near-fatal blow as Binance pulled out of a last-minute deal to save the embattled FTX, the need for effective oversight regimes for companies that now hold the fate of billions of investor’s dollars in their hands has never been clearer.

All this happened just as regulators around the world were starting to give the crypto industry a much-needed sheen of credibility.

Even so, the point of crypto regulation should be to prevent the kind of opaque corporate interconnections that were the downfall of Alameda-FTX. One of the guiding principles of financial regulation for banks, for example, is that there should be at least some degree of separation between investment and retail banking. History teaches that when they become too entwined, the results can be disastrous.

In light of the latest dramatics, there are important lessons to be learned by those who write the rules by which exchanges like FTX play.

After all, FTX has been licensed by more than a dozen regulators worldwide, including many that were specifically set up to oversee crypto firms.

Related: FTX Deal Collapse Shines Light on Shaky Crypto Ecosystem

Most recently, this month the exchange launched in the United Arab Emirates thanks to a licence granted by Dubai’s Virtual Asset Regulatory Authority (VARA).

But as Dubai attempts to court the world’s crypto companies with the promise of regulatory clarity, critics have pointed out that the VARA has yet to release any comprehensive regulatory framework that companies can use to create or launch products.

What’s more, following FTX’s fall from grace, there will likely be questions over how the firm was able to gain regulatory approval without concerns being raised about its liquidity framework and ability to safeguard investor’s funds.

Lessons for European Regulators

Among the exchange’s collection of global licenses are two European registrations held by FTX subsidiaries in Switzerland and Cyprus, the latter of which is used by the firm to passport its services across the European Economic Area.

And yet, European customers who visited the FTX website on Thursday (Nov. 10) were met with the same message as all the company’s global users: “Following recent events, please be informed that all onboarding of new clients, deposits and withdrawals has been suspended until further notice.”

That’s not the message traders want to hear if they assumed that a European stamp of approval meant their assets were in safe hands.

And that’s also not a message that trading platforms like Gemini, which this week announced its expansion into five additional European markets, will want to be associated with either.

Like other exchanges, FTX registered with the Cyprus Securities and Exchange Commission in anticipation of the coming Markets in Crypto Assets (MiCA) regulation. But although it has been agreed in principle, last week, PYMNTS reported that a vote on the EU bill was facing a delay of several months as lawmakers wrestle with the sheer complexity of the task.

With authorities around the world weighing similar legislation, in the coming weeks and months, an important conversation needs to be had regarding the need for prudential liquidity standards for crypto exchanges. This is particularly because while regulatory initiatives like MiCA enshrine requirements designed to protect consumers,  they have typically focused much more on anti-money laundering.

When the issue of consumer protection is raised, the emphasis has often been on warning about the risks of crypto investing. But as the case of FTX demonstrates, putting safeguards in place to ensure the responsible custody of crypto assets is equally, if not more, important.

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