An ECB official, Elizabeth McCaul, has warned that incoming regulations for crypto assets in the European Union (EU) will allow some of the industry's largest players to escape stricter supervision and require an overhaul. In a blog post, she suggested that there are gaps in the framework for regulating crypto markets and that traditional approaches to financial market oversight might not work. Her view reflects growing concern in Europe over the region's ability to oversee the crypto industry, which has been marred by several high-profile scandals in recent months including the collapse of exchange FTX. McCaul also stated that firms like Binance, which claim to have no formal headquarters, pose "challenges for our current regulatory and supervisory approaches”.
Her comment is a further sign of mounting regulatory pressure on Binance, the world's largest crypto trading exchange. The US Commodity Futures Trading Commission filed a lawsuit last month against the exchange, accusing it of illegally serving US clients. The CFTC also cited internal communications that it said showed Binance knew the platform facilitated potentially illegal activities.
The EU has drawn up an extensive set of rules, known as the Markets in Crypto Assets (Mica) regulation, due to come into force in 2024. Mica will bolster governance, segregation of customer funds, and external audit requirements, she said, while warning that "certain areas still need further strengthening". For crypto asset service providers to be considered significant under Mica and therefore supervised by the European Banking Authority in cooperation with the ECB, they must have at least 15 million active users in Europe, a threshold McCaul said was likely to miss Binance and FTX, before its collapse. Smaller crypto providers will be supervised by national EU authorities.
She suggested the threshold be adjusted to account for different business types and be measured "at group level rather than an individual entity level". Stricter rules and enhanced supervision should apply to crypto groups classified as significant, which they do not under Mica, she added.
Crypto groups often have opaque structures criss-crossing many national borders. McCaul said regulators needed to supervise them at a group level to identify conflicts of interest and "opportunities for regulatory arbitrage".
Her concerns build on those already expressed by other top European regulators. The ECB's chair of supervision Andrea Enria had warned that crypto platforms posed a "huge consumer protection issue" because they did not respect national borders. EBA chair José Manuel Campa praised Mica but admitted there were blind spots in the package.
Binance is also seeking to convince US regulators to greenlight a deal that would allow Binance US, the company's US affiliate, to purchase the assets of Voyager Digital, a crypto company that went bankrupt last year. The deal is under review by the Committee on Foreign Investment in the United States, a government agency that determines if overseas investments present national security risks.
Binance said in a statement: "Over the years, Binance has been vocal about the need for effective and appropriate regulation. Mica is a welcome and pragmatic step in the right direction on this, harmonizing requirements across the EU and creating a single market for crypto."
On April 20, 2023, the European Parliament approved the first piece of EU legislation aimed at tracing transfers of crypto-assets and preventing money laundering. The legislation, which received 529 votes in favour, 29 against, and 14 abstentions, includes common rules on supervision and customer protection. The text is based on the "travel rule", which is used in traditional finance and will now cover transfers of crypto-assets. Additionally, the law will cover transactions above €1000 from self-hosted wallets when they interact with hosted wallets managed by crypto-assets service providers. The legislation also includes uniform EU market rules for crypto-assets, which cover supervision, consumer protection, and environmental safeguards. The rules will apply to crypto-assets that are not regulated by existing financial services legislation, with key provisions covering transparency, disclosure, authorization, and supervision of transactions. The legislation also includes measures against market manipulation and to prevent money laundering, terrorist financing, and other criminal activities. Finally, significant service providers will have to disclose their energy consumption to reduce the high carbon footprint of crypto-currencies. The legislation will now need to be formally endorsed by the Council before publication in the EU Official Journal, and it will enter into force 20 days later.