High hopes for crypto’s ability to revolutionise the financial world were dealt a harsh reality check with the collapse of the FTX cryptocurrency exchange last year. With Luxembourg having early on placed a bet on crypto, some have suggested it could suffer reputational damage. New regulation including the European Union’s MiCA regulation however may offer a way to do crypto safely, Thursday’s debate at Swissquote’s Luxembourg event heard.
FTX collapsed following a CoinDesk report highlighting potential leverage and solvency concerns involving an FTX affiliated trading firm. This shook the volatile crypto market, whose valuation fell below one trillion US dollars. After an effort to find bailout funds failed, the firm’s CEO stepped down and the company filed for bankruptcy. Shortly afterwards, FTX suffered the theft in the “hundreds of millions” worth of its tokens. A new chief executive named John Ray is reported to be trying to revive the platform.
Luxembourg’s decision as far back at 2014 to welcome crypto exchange businesses could be seen as ironic given the current state of that sector, which has been described as “melting down”. Nadia Manzari, currently a partner with the Schiltz & Schiltz law firm, was back then a member of the CSSF financial regulator’s innovation, payment, market infrastructure and governance department and was instrumental in opening the way for crypto.
Not a mistake
Manzari rejected any suggestion that the earlier policy had been an error. “If you look at the events now, it’s not necessarily because of the cryptos that this meltdown happened but because of their mis-governance,” she said.
Manzari recalled the thinking around the time Luxembourg took its decision, just after the European Banking Authority had issued a warning. “We realised that most of the risks highlighted in that warning could also be risks of high risk financial products or other financial services that already existed so traditional ones at that time,” she said. “So the very new risks were more related to the technology, to the infrastructure and which according to us were risks which you could not mitigate.”
MiCA has the answer
Most of the problems with a firm like FTX could be handled by the forthcoming MiCA regulation, Manzari said. “Everything that was missing at FTX is going to be rule when MiCA comes.” She argued that this will soon make crypto products ordinary.
There is an argument that massive collapses, being so common, are part of human nature, noted Jack Ehlers, the chief operating officer at Bitstamp, a cryptocurrency exchange based in Luxembourg since 2011. “We’ve got some of these big personalities or people who are trying maybe to promote their business way too fast and they really cut corners.”
While Ehlers strongly supports regulation setting out a standard, he expressed discomfort with how FTX was able to build confidence by employing “the best of the best.”
Trusted institution fails
FTX was a corporate disaster, said Nestor Verrier, general manager of Swissquote Bank Europe. Two weeks prior to the firm’s collapse, it was a “trusted, reputable institution,” he noted. He argued it wasn’t simply a failure of FTX, but “a demonstration of the failure of the entire industry” due to its failure to respect simple corporate principles. Ehlers took exception to this, arguing “the whole industry has not failed.”
The new FTX CEO, John Ray, had a background in dealing with the bankruptcy of Enron. Verrier summarised Ray’s findings after two days of investigation: “High risk, high leverage, facilitated by the use of their own token,” he explained.
Failure of corporate governance
“And of course an absolute lack of internal arrangements, governance – I’m not saying weak, I’m really saying none and absent governance, internal arrangement and financial reporting – none of those was there before,” said Vernier, who questioned how the former FTX leadership had missed this.
Ehlers pointed out the 11-12 year wait for regulation like MiCA or virtual asset service provider registration for AML. Even with the new measures, “we have really cracked or untied this knot of regulation”, he said. “There’s been a lot of back and forth, a lot of hesitation to get involved.”