EU crypto legislation will mitigate events like FTX collapse: policy experts

The proposed acquisition of the FTX crypto exchange by rival Binance is bringing European regulators and experts forward — and they're commenting that the bloc’s new digital asset legislation will mitigate such market spirals in the future.

"The crypto space is not a gambling casino," said Stefan Berger, a social-liberal member of the European Parliament who was a lead negotiator on the Markets in Crypto-Assets legislation expected to pass Parliament early next year. "MiCA is the bulwark against Lehman Brothers moments such as the FTX case," he added in emailed comment to The Block.

Berger also pointed out that MiCA includes provisions to segregate assets of clients and funds, put in place internal control mechanisms and provide transparency to clients.

"Just like banks, crypto asset service providers need mechanisms that ensure risk management," continued the MEP.  

After FTX CEO Sam Bankman-Fried shocked the crypto industry by announcing that the exchange’s non-U.S. assets would be sold to Binance, the unfolding drama led to several cryptocurrencies tumbling amid a spiraling market.

“This is very bad for the industry,” said Dimitris Psarrakis, a former European Parliament policy specialist and current advisor on several crypto legislations in the EU institutions. He added: “I suspect that this story was super informative for the regulatory authorities."

The European Union is on the verge of passing a comprehensive legislation on crypto assets and their service providers, with new laws expected to be enforced in 2024. Until then, financial regulators need to iron out the details of how the regulation will be applied. The European Securities and Markets Authority will be the main body responsible for fleshing out rules on crypto asset service providers. 

The MiCA legislation outlines prudential requirements for crypto asset service providers, such as exchanges, covering capital requirements, investor protection and market integrity. This is especially prominent in MiCA’s Title V, on the authorization of crypto-asset service providers. The process of winding-down activities as a crypto firm is also outlined.

“I suspect that the supervisory authorities now drafting the delegated acts will reach Title V, taking into account what happened in order to prevent market failures like that in the European setting in the future,” Psrrakis added.

For Robert Kopitsch, director of a Brussels-based crypto lobbying group, there is a silver lining to the FTX acquisition. "From a political perspective, I can say that it's always positive if mergers lead to more consumer protection, better services and more security," he told The Block. "That's the ideal outcome."