The cryptocurrency world is reeling after the collapse of crypto exchange FTX — but EU policymakers are patting themselves on the back.
FTX was the world's third-largest exchange where people could buy and trade Bitcoin and other cryptocurrencies, and a key node of the global financial network underpinning the crypto industry. It declared bankruptcy this month, losing at least $1 billion in customer funds after leaked documents raised questions about its solvency.
In Brussels, EU lawmakers are claiming the bloc's upcoming crypto rulebook, Markets in Crypto-assets (MiCA), would prevent future FTX-level scandals.
MiCA should “be taken as a global model” for crypto regulation, said Stefan Berger, the center-right MEP who shepherded MiCA through Parliament, adding it "addresses exactly this problem" that caused FTX to topple. “[It] provides internal control mechanisms, makes evidence of good management mandatory, and provides segregation of assets of clients and funds,” Berger said.
Europe is among the first regions in the world to create a wide-ranging law for crypto assets and providers of crypto services. The EU sees itself as a leader in regulating new technologies, often referencing its General Data Protection Regulation and draft artificial intelligence law as examples.
It's now doing the same for crypto: “MiCA will protect consumers, market integrity and financial stability. It will bring crypto-asset exchanges, wallet providers or issuers of crypto-assets under EU supervision,” a European Commission spokesperson said about FTX's crash.
The regulation is expected to only enter into force in mid-2023 at the earliest.
But it is already having a deterring effect, analysts claim. “While MiCA is not in force yet, it foreshadows what will come, and makes criminals stay away,” said Philipp Sandner, head of the Blockchain Center at the Frankfurt School of Finance and Management.
For now, the European Union seems only limitedly touched by FTX's meltdown.
The European Central Bank's Vice President Luis de Guindos told reporters earlier this month that the fall of FTX was “not a surprise” but said the exchange’s demise had not reverberated in any significant way through the broader financial markets.
The crypto exchange's customers were scattered worldwide but most users were likely in non-EU countries, according to crypto data aggregator CoinGecko. The firm singled out South Korea, Singapore and Japan as the top three countries sending visitors to FTX’s website. Only Germany (in the fifth spot), Italy, the Netherlands and France featured in CoinGecko’s 30-country list.
“European citizens were not so affected — not so many people had registered with FTX,” said Sandner, at the Frankfurt School of Finance and Management. “I know hundreds of people in the crypto space, and I only know two individuals who had been FTX customers — and they got their money out.”
Sandner said that national regulations in Germany and France require companies holding customers’ crypto to register with financial authorities and prevent unregistered actors from advertising in the country. He said it staved off FTX establishing a foothold in major EU countries. Similar rules also shielded Switzerland and the United Kingdom from the turmoil, he added.
Some EU countries, like Cyprus, did get caught up in the crash. On September 15, FTX announced it obtained a license from Cyprus' Securities and Exchange Commission (CySEC), which cleared the company to provide EU citizens with investment services in crypto-backed derivatives, although FTX was not allowed to conduct cryptocurrency trading. CySEC suspended FTX’s license on November 9.
MiCA, even when it is implemented, might already be in need of an update in light of the disaster, some lawmakers warned. The Parliament’s economic affairs committee is holding a hearing on the FTX meltdown this Wednesday.
“[There is] urgent need to address additional challenges that are not covered in MiCA," said Ernest Urtasun, a Spanish Green MEP who also worked on MiCA. He singled out crypto lending, the connection between crypto organizations and traditional finance, and the potentially growing risks of DeFI, or decentralized finance, which is run by organizations without clear structure or leadership and through automated blockchain software.