In a recent blog, Elizabeth McCaul, European Central Bank (ECB) supervisory board member, commented on the upcoming crypto legislation. The ECB official said that the upcoming European Markets in Crypto Assets (MiCA) bill does not provide adequate supervision for crypto exchanges.
McCaul adds that MiCA does not supervise exchanges based on quantitative metrics. However, she acknowledges the potential of the bill calling it a progressive step.
Explaining the flaws, McCaul said that in its current form, the MiCA bill would not consider FTX a “significant” crypto asset service provider despite the exchange having close to 15 million customers. McCaul then adds that even Binance may not be listed in the category of “significant exchanges” despite having between 28 and 29 million global customers.
Hence, she suggests that the bill should be enhanced by metrics like trading volume and assets under custody. McCaul then cites a 1970s initiative by the Basel Committee on Banking Supervision, saying that the metrics she suggested would be able to represent the corporate group that an exchange belongs to rather than just a local entity.
In the context of FTX, she added that even if the exchange had basic risk and governance controls, regulators had no oversight of its operations in different jurisdictions.
Additionally, McCaul claims that FTX’s rival, Binance, also operates in multiple jurisdictions and has not disclosed its physical location since leaving Japan in 2018. This lack of domicile for regulatory purposes doesn’t mean the group should not be subject to legal accountability.
However, McCaul is not the only one to raise concerns about MiCA. Last month, Laura van Geest, Chairman of the AFM, said the Netherlands will take a tough line in enforcing the EU’s Market in Crypto Assets (MiCA) regulation. The regulator also specifically says that it will continue its stance even if that means the businesses will go elsewhere. The AFM head said that cryptocurrency wasn’t good news, linking it to fraud, manipulation, and speculation and the MiCA will only partly address its risks.
Sources reveal that while some crypto firms have adopted a risk-management-oriented approach to operating in countries like the US, after the 2008 financial crisis, there aren’t any uniform federal standards to mitigate crypto-specific risks, such as rules around using customer assets to engage in leveraged trades or on ways to ensure enough liquidity for periods of high outflows.
To this, Mark Beasley, a professor specializing in enterprise risk at North Carolina State University, says that compliance programs at most exchanges focus on cybersecurity, legal and compliance risks, liquidity risks, and credit risks. However, the effectiveness of these standards is difficult to evaluate for outside observers and a more uniform approach could foster basic public trust.
Crypto exchanges around the globe have been on the regulator’s radar for a while. Even though Hong Kong has advocated for cryptocurrencies, the new licensing scheme for crypto firms in Hong Kong might take risk management to a whole different level.
Under the new regime, crypto firms must hold customer assets on trust through a wholly-owned separate but associated entity. Additionally, it mandates exchanges to hold at most 2% of customer assets in hot wallets and a platform operator should not deposit, transfer, lend, or involve client assets in third-party transactions alongside other provisions.
Similarly, in December, The Philippines’ Securities and Exchanges Commission (SEC) warned its citizens against using unregistered cryptocurrency exchanges. It said that any enterprise wishing to conduct business in the nation must register with the SEC, the government agency reaffirmed, citing national regulation.
The EU’s MiCA offers a single set of rules aimed at providing regulation and promoting innovation, but with investor’s safety in mind. The regulation will be put into practice by national authorities across the continent. Several countries like France have come ahead in support of the MiCA.
However, it is important to note that countries across the globe have set their eyes on Europe as its MiCA could be a landmark for regulating the sector. Hence, McCaul’s statement marks an important instance as the lawmakers are preparing to vote on the legislation following a series of delays. The legislation is expected to be voted on after a discussion scheduled for April 18.