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The FTX scandal has got the EU’s central bank chief calling for a MiCA II already, but parliamentarians and industry simply want to get the original regulation over the finish line.
In 2022, the European Central Bank’s (ECB) Christine Lagarde made an intervention for a Market in Crypto-Assets (MiCA) II framework.
This, she said, “should regulate the activities of crypto-asset staking and lending, which are definitely increasing”.
She made this call to the European Parliament’s Economic and Monetary Affairs Committee following the collapse of FTX, which has since resulted in a highly anticipated criminal trial of the company’s founder, Sam Bankman-Fried.
Yet, MEPs on the committee appear to be less enthusiastic.
“At this stage it's premature to be talking about a revised MiCA framework,” said Ondřej Kovařík, a member of the European Parliament who sits with the centrist Renew faction.
He told VIXIO “we are yet to see MiCA in the official journal, and following the publication there will be a period during which supervisory authorities and the commission will need to draft a very large amount of secondary legislation”.
Kovařík pointed out that people will only truly see if the provisions in MiCA are sufficient from around the beginning of 2025.
“We do have review provisions in the regulation, although in a sector that is so fast-paced, of course we will need to ensure proper implementation and enforcement of the regulation and all of its elements before we know with certainty what provisions may need to be reconsidered in the main regulation.”
When VIXIO put this to fellow EU parliamentarian Markus Ferber, he was open minded on the idea.
“I am always in favour of monitoring the implementation of European legislation properly in order to identify any shortcomings,” Ferber, who sits with the centre-right European People's Party, said.
“In that sense, I am sure that MiCA will not be the last piece of European crypto legislation. However, before we talk about MiCA II though, I think it would be appropriate to first start implementing the first iteration of MiCA.”
MiCA is due to pass the final stages next month before entering the EU’s official journal at a European Parliament plenary session.
Any re-openings could inevitably set the regulation back and leave businesses, which are already in the process of preparing to comply, in a state of uncertainty.
"I want the final version of MiCA to pass smoothly,” said Johannes Wirtz, a partner at Bird & Bird.
Wirtz noted that every change that is made now will cause more delays. “If we now change more, it will open up the whole discussion again and we won't get an enacted version for quite a while. It is better to get it implemented while also starting to discuss MiCA II."
"We could see a rapid series of MiCA iterations, as we have seen with the AML directives, to reflect the evolution in technology,” suggested Simon Deane-Johns, a solicitor at Keystone Law.
For example, the EU’s 4th Anti-Money Laundering Directive was introduced in 2015, followed by a fifth in 2020, and a sixth in 2021.
The EU political institutions are also currently in the process of introducing a seventh directive, alongside a first regulatory framework.
FTX proof?
Several of the people VIXIO spoke to were doubtful that MiCA in its current guise would be able to prevent a scandal such as the FTX one, but it could have helped.
"I don't think that MiCA would have prevented the FTX scandal,” said Wirtz. “This is mainly based on the argument that FTX was not in Europe, so MiCA wouldn't apply, and European customers could use the platform anyways.”
In addition, he added that the MiCA framework does not target proof of assets, while fraud is also hard to prevent happening, as evidenced by the traditional financial sector.
“In my view, MiCA in itself would not have been enough to protect consumers, but that is due to the fact that the failure happened outside the EU,” Kovařík said.
He continued to state that MiCA sets a strong framework for the future of trading in crypto. “Had the FTX scandal hit when MiCA was in effect, I believe it would have helped in a number of ways, for example through the requirements on reserves, consumer protection policies and also the ban on reverse solicitation.
“I hope that in the EU we can engage with our international partners to facilitate more rule-making covering the crypto sector in order to identify risks and potential failures at an earlier stage.”
The risk of scandal is reduced by MiCA, suggested Wirtz. “Regulators are already taking a close look at who is applying for a licence and there is also a question of who is competent to manage those businesses.”
At the same time, he pointed out that there is a segregation of asset context in MiCA. “Therefore, it shouldn't be so easy to use clients' funds to associate companies and play or gamble. I think it is a good first step, but there will always be a way for bad actors to commit a crime.
“If MiCA had already been in place, FTX would probably have registered as a crypto-asset services provider and would have had to apply all of the MiCA governance requirements,” said Ferber.
Ferber set out to VIXIO that, in theory, these requirements are sufficiently strict and, if properly adhered to, could have probably prevented a lot of the problems that have stemmed from FTX.
“A lot comes down to good enforcement of those rules though,” he said. “The effectiveness of the MiCA rule will depend a lot on how well they are enforced in practice.”
Ferber added that it is still unclear to this day to what degree the FTX failure was due to colossal mismanagement and to what degree to criminal activity.
“We have seen in the past that in cases of sophisticated fraud schemes supervisory authorities sometimes fail to spot the problem," he cautioned.
“That being said, I believe that with the MiCA rules in place, the problems with FTX would have definitely been spotted earlier.”
Not a silver bullet
"MiCA is no panacea, but I wouldn't say that the regulation is out of date, and has a broad approach for the three types of crypto that it aims to regulate,” suggested Deane-Johns.
“A lot of the details will probably fall to the national regulators, and each will have its own framework, so there will be differences between a BaFin regulated firm and one that is regulated by the Central Bank of Ireland, for example."
The London-based lawyer added that no matter what, there is always a chance that white-collar criminals could slip through the regulatory net.
"Look at what Bernie Madoff did, you can always have a determined fraudster or bad actor who will still do things and pull wool over your eyes, even if there is regulation in place,” he said.
“Criminals can persuade authorities and consumers that they are following the rules when really they aren't.”
Deane-Johns argued that there is no amount of regulation that will stamp out the potential for fraud, and there are plenty of firms that have pretended to comply with laws that they have not actually complied with.
“Look at banks and compliance with AML laws. Some say that they have innocently failed to comply, and pay massive settlements."
