FTX collapse shows urgent need to finalise EU crypto rules, says European Commission

The "questionable practices" at now collapsed crypto exchange FTX would not have been allowed to happen under European Union rules that need to be finalised urgently, a senior European Commission official said.

The crash in bitcoin led to a "crypto winter", which saw the collapse of crypto exchange FTX, and earlier this week cryptocurrency lender BlockFi filed for bankruptcy protection.

The European Union has reached agreement on groundbreaking markets in cryptoassets rules (MiCA) for licensing and supervision, expected to come into effect in 2024 and putting the bloc at the forefront of regulating a sector which has shrunk dramatically.

Untitled Carousel

But Alexandra Jour-Schroeder, deputy director general at the Commission's financial services unit, said it was a matter of urgency to complete approval of MiCA with a final vote in the European Parliament.

There were questionable practices at FTX where there was no proper record keeping or separation of customer and company accounts, she said, adding that about 10% of the company's customers were in the bloc.

"All these failures are very serious. We don't see them as failures of blockchain or crypto assets per se," Jour-Schroeder told a European Parliament hearing.

"Under the MiCA regime, no companies providing cryptoassets in the EU would have been allowed to be organised, perhaps it's better to say disorganised, in the way FTX reportedly was."

European Central Bank President Christine Lagarde told the parliament earlier this week that MiCA is one step in the right direction, but there will "have to be a MiCA 2" with a broader scope.

GET MICA DONE

Jour-Schroeder cautioned against reopening negotiations on MiCA, saying the priority is to quickly approve the original rules which provide important protections to investors and the financial system.

"It has to be implemented. That does of course not mean the commission will stop thinking after MiCA 1," she said, adding the EU executive would look at decentralised finance, and crypto lending.

"Let's not do the second step before the first," she said. "This MiCA will make a step change forward compared with the status quo."

FTX had a licence to operate in the EU from the Cyprus securities regulator for traditional securities but not cryptoassets, which was suspended when the company's problems began to unfold.

Steffen Kern, head of risk analysis at the EU's European Securities and Markets Authority (ESMA), said there is evidence of market abuse, poor governance and lack of controls in crypto markets, but there is no significant risk of spillovers into the wider financial sector from FTX specifically.

"There are problems in this industry. The regulatory framework, once it comes into force, will be extremely important in tackling these issues," Kern said.

Asked if ESMA could in the meantime use its powers to ban crypto products, Kern said detailed data is needed to justify intervention, but figures are limited for an offshore market, with data from companies unreliable.

"Enforcing such a product intervention would probably be a particularly difficult thing to do," Kern said.