European regulators will struggle to oversee crypto groups, ECB warns

European regulators will struggle to oversee crypto groups, ECB warns

The head of financial supervision at the European Central Bank has warned that regulators will find it difficult to supervise providers of crypto assets, which “never think about financial risks”, do not respect national borders and pose “a huge problem of consumer protection”.

Andrea Enria, chair of the ECB’s supervisory board, told the Financial Times: “I am worried about my colleagues who will have to carry out this oversight in the future because they are difficult animals to engage with.”

Global regulators have scrambled to respond to the collapse of crypto exchange FTX, which filed for bankruptcy in the United States on Friday after failing to close an $8 billion funding shortfall and leaving customers from around the world whole face heavy losses.

The collapse of FTX dealt a mighty blow to a crypto industry already reeling from a series of failures in the sector this year, including stablecoin TerraUSD and crypto lenders Celsius Network and Voyager Digital.

The EU is finalizing legislation to bring providers of crypto assets under a regulatory framework for the first time, known as crypto asset markets, which will replace a patchwork of national rules. Enria said he was proud that the EU was the first jurisdiction to “subject these entities to some form of oversight”, but predicted it would be an “interesting challenge”.

“When you talk about risk management with them, they have a different mindset,” he told the FT at a Dutch central bank event last week. “They only think about computer security; they never think about the financial risks, so I don’t know how our toolkit will work with these types of animals.

One of the biggest issues facing regulators was the difficulty of determining where many crypto asset providers were based, Enria added. “Our tools are focused on legal persons and territories,” he said. “The two problems with these crypto asset providers are not there.”

FTX’s public disclosures revealed a multi-jurisdictional network of wholly-owned subsidiaries and inter-company loans, including entities in the Bahamas, Cayman Islands, Antigua and Barbuda, as well as the United States, Japan , Germany and Switzerland.

In Europe, FTX was granted a license to operate as a Cypriot investment firm in September after acquiring Cypriot rival K-DNA Financial Services which allowed it to operate across the EU, but the local regulator suspended this authorization on Friday.

FTX’s main rival, Binance, has avoided having an identifiable head office for years, but recently gained oversight in several jurisdictions, including registration in France and a license in Dubai.

Enria says a major crypto asset provider has threatened to route more of its European clients’ transactions through its offshore entities if incoming European regulations try to force it to provide significantly more euro-denominated issuance .

“They said ‘This is unreasonable, it should be changed. But, eventually, if you don’t change, we will provide European customers with the same type of dollar-denominated assets via the Internet through our store in other jurisdictions’ , he said, “It will be very difficult to control these types of requirements.”

The crypto market is “still not big enough to really generate a financial stability issue right now,” Enria said, but he added that “banks will have to engage somehow. other” with the crypto world.

He added, “The investments most exposed to these types of crypto asset providers are the weakest segments of the population; the least rich, the poorest, the minorities. This is a concern, it is a major challenge for consumer protection authorities.

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