European Union rules known as the Markets in Crypto Assets regulation (MiCA) that are expected to go into effect in 2024 would have stopped FTX-style mismanagement, officials said on Wednesday – despite lawmakers' skepticism over whether the new rules will be effective if they become law.
The crypto exchange’s collapse has led to calls to toughen or bring forward the rules, which require crypto companies to register with authorities and meet governance standards that other kinds of financial firms must follow.
But the European Commission, which proposes EU legislation, said that the rules would have helped.
“Under the MiCA regime, no company providing crypto assets in the EU would have been allowed to be organized, or perhaps I should say disorganized, in the way FTX reportedly was,” Alexandra Jour-Schroeder, deputy director general at the European Commission’s financial-services arm, told lawmakers at a hearing on Wednesday.
Failings at FTX such as inadequate record-keeping and the misuse of client assets were “very serious” and “potentially even fraud,” Jour-Schroeder told lawmakers on the European Parliament’s Economic and Monetary Affairs Committee in Brussels, but added that she doesn't "see them as failures of blockchain tech or even crypto assets per se.”
“With MiCA we will take a step change forward compared to the status quo,” she said.
The law has been agreed upon in principle and is due to get a final vote from lawmakers in February. It is “urgent,” but she said she didn’t expect a renegotiation to shorten the 12- to 18-month time frame before the rule goes into effect.
Earlier this month, FTX filed for bankruptcy in the U.S. following CoinDesk revelations of a blurring of lines with its supposedly separate trading arm, Alameda Research. Investors and customers must now depend on bankruptcy proceedings to get their money back.
About 10% of FTX's customers were in the EU, and one subsidiary, FTX Europe Ltd., was until early November supervised by the Cypriot financial regulator.
Lawmakers weren’t entirely convinced by Jour-Schroder’s assurances, seeing FTX as a symptom of wider issues.
“In the world of crypto there are constant problems,” said left-wing French lawmaker Aurore Lalucq. “Every day there is market manipulation and people who are embezzling.”
“I’d like the Commission to wake up a bit,” Lalucq added. “Can we really hold our heads up high and say that Binance, for example, which is registered in Europe… couldn’t possibly go bankrupt?”
Binance is the world's largest cryptocurrency exchange.
Ernest Urtasun, a member of the European Parliament’s Green grouping, said he has "serious doubts that MiCA would have prevented” the FTX scandal and called for short-term measures to address risks or block risky crypto products.
“We need to have a means of acting very fast,” he said.
Officials from the European Securities and Markets Authority, or ESMA, appeared to agree that FTX isn’t a lone case of malpractice among crypto companies, but stressed that new EU laws were a start to address the issues raised by FTX.
“I wouldn’t comment on individual cases, but generally speaking, the industry has many signs of weaknesses across all key functions,” said Steffen Kern, head of ESMA’s risk analysis and economics department, citing poor management and failures to segregate client funds. “MiCA, had it been in place, would have been extremely helpful.”
Stefan Berger, the center-right lawmaker who was an architect of MiCA, defended the rules and said the blame should lie instead with FTX founder and former CEO Sam Bankman-Fried.
“FTX was the Lehman Brothers for this community,” Berger said, but added that the responsibility lay with “the behavior and hubris of an individual, Sam Bankman-Fried,” rather than with blockchain technology.
“MiCA has to be passed as quickly as possible,” Berger said, and “come into force so that in Europe, we have rules which rule this type of situation out from the word go.”
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