European Central Bank supervisory board member Elizabeth McCaul says the upcoming European Union Markets-in-Crypto assets bill does not provide adequate supervision for crypto exchanges.
McCaul argues that while the new bill is a progressive step, it does not supervise exchanges based on quantitative metrics.
McCaul: MiCA Would Not Consider FTX and Binance ‘Significant’
In its current iteration, the MiCA bill would not have considered FTX a significant crypto asset service provider, despite the exchange having less than 15 million customers. McCaul points out that even Binance may not make the cut despite having between 28 and 29 million global customers.
Rather, she suggests that the bill should be enhanced by metrics like trading volume and assets under custody.
Citing a 1970s initiative by the Basel Committee on Banking Supervision, McCaul believes these metrics must represent the corporate group that an exchange belongs to rather than just a local entity.
Considering FTX, she added that even if the exchange had basic risk and governance controls, regulators had no oversight of its operations in different jurisdictions.
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, McCaul argues.
Upon taking over leadership of FTX and its associated entities after the exchange filed for bankruptcy in Nov. 2022, incoming CEO John Ray harshly criticized the exchange’s lack of corporate controls.
Haphazard Approach to Risk Not Helpful, Says Professor
While some crypto firms have adopted a risk-management approach required by large financial institutions in the U.S., after the 2008 financial crisis, no uniform federal standards exist that mitigate crypto-specific risks, such as rules around using customer assets to engage in leveraged trades and how to ensure enough liquidity for periods of high outflows.
Instead, 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. A more uniform approach could foster basic public trust.
“These things sound good, but what’s running through my mind is…are these efforts coordinated and connected, and are we seeing gaps in these processes?” questioned Mark Beasley, a professor specializing in enterprise risk at North Carolina State University.
Striking the Correct Risk-Management Balance
The recent banking collapses highlight the importance of adopting uniform standards to ensure transparency.
Former U.S. President Donald Trump revised elements of the Dodd-Frank Act to allow smaller U.S. banks to hold reserves of long-term treasuries, which proved catastrophic for the recently-collapsed Silicon Valley Bank.
Critics like Senator Elizabeth Warren have argued that the bank should have maintained a higher risk bar to prevent it from collapsing in mid-March 2023. She argued that it should have kept reserves in more liquid assets, as originally mandated by the Dodd-Frank Act.
But on the flip side, a Feb. 2023 consultation paper outlining a new licensing scheme for crypto firms in Hong Kong may take risk management to an untenable level.
Under the new regime, crypto firms must hold customer assets on trust through a wholly-owned separate but associated entity. It must hold at most 2% of customer assets in hot wallets. A platform operator should not deposit, transfer, lend, or involve client assets in third-party transactions. It must also hold an insurance policy to manage risks associated with customer assets.
Platforms must also evaluate the regulatory status of each asset it lists in the jurisdiction it offers trading.
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