Yesterday, the ESMA provided its perspective on the collapse of FTX (through the opening statement of the Economic and Monetary Affairs Committee of the European Parliament available here). For sure, this is is not the latest we have heard from EU and other regulators on crypto (see ao here), nor the most elaborate discussion, but it does definitely give some pointers on how the EU and its member states might approach crypto winter and the termoil that goes with it.
As ESMA points out itself at multiple instances, it was not involved in the case - neither as a regulator nor as a supervisor. As such, it could be expected that ESMA’s remarks would be well-measured, calling for further regulation on governance of crypto service providers and basically a ‘so this is why we need MiCA and/or further regulation’ (which indeed turned out to be the case).
However, 3 points in particular did strike my attention:
1. ESMA does not have access to ‘insider’ information on FTX #
ESMA starts their statement by indicating that they do not have access to any information on FTX beyond what is in the public domain.
This could be considered kind of surprising, as one would expect instances like ESMA to be in touch with other regulators and supervisors in case of collapses that might have substantial impact on a financial market and EU retail investors - especially given FTX’s assumed links with BlockFi troubles and now possibly also Silvergate that is unwillingly moving to center of investor attention.
As ESMA indicates itself later on in the statement, the collapse of FTX is likely to cause major detriment to retail investors, including in the EU, and there remains potential for contagion from the FTX episode. ESMA concludes by indicating that ‘EU authorities will, therefore, need to continue to cooperate closely with counterparts internationally on such matters’.
This makes it even more surprising that apparently, at this point, they do not have access to non-public information (if true), as it either means that (1) they are not in contact with other regulators, (2) other regulators are not willing to share information they have which is not public, (3) all information is actually shared real-time (and hence public), or (4) other regulators do not have access to insider information either. Not sure what would be more worrysome…
2. ESMA does not see significant risk of spill-overs to non-crypto #
Closely related to the above point, it is remarkable (though not surprising) that ESMA firmly confirms that ‘at present [it] does not see significant risks of major spill-overs into the wider financial sector, given that crypto assets represent less than one percent of total market capitalisation across traditional asset classes, and the fact that interlinkages accross the crypto and traditional financial markets have remained relatively limited’.
Earlier this fall, ESMA published a more elaborate study on this point of view (see here), further identifying the risks in the market, and analysing the interlinkages with traditional markets.
In my view, this stance is also corraborated by the fact that current crypto winter does not seem to halt the entry into crypto and the investment in digital assets by institutionals (see here), even if some institutionals have refrained from initial efforts.
However, it is a strong statement in light of the many major VCs and hedge funds that appear to be involved in the FTX crash-and-burn.
3. ESMA subscribes to ‘Lead by regulation’ approach #
Finally, right before wrapping up, the ESMA acknowledges and states that ‘Service providers domiciled outside the EU play the dominant role in crypto markets. They should be expected to do so even after the implementation of a regulatory framework in the EU.’
This is of course fully true, and not that noteworthy. More remarkable is that, by the use of the wording ‘even after the implication of the regulatory framework’, ESMA seems to imply that MiCA will in its view attract crypto activity to the EU and be a (major) catalysor for crypto activity in the EU.
Although this is rather contested (see ao this recent FT article, that challenges the utility of MiCA as a regulatory instrument alltogether), it is in my opinion part of the general approach of the EU to lead in regulation rather than in technology (which is also prevalent in eg. AI). It remains to be seen whether this is a sensible approach - and future will tell.
But it is noteworthy that one of the international players that was most vocational about additional regulation on crypto service providers used to be…
– Note: This post is a personal opinion/analysis and cannot be considered legal advice. Feel free to reach out if you wish to discuss further or require advice for your specific situation! –