The Downfall of FTX and the Rise of MiCA
But also — Twitter Blues, Schengen Boom, ECB, Iran, G20, COP27
Hi! This is Monday, 21 November 2022, and here’s the news you need to start your week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and Linkedin.
With the FTX Collapse, Spotlight on the EU’s (Upcoming) Landmark MiCA Regulation
The tech winter is happening as FTX’s downfall, Twitter’s rocky takeover, industry-wide layoffs, and plunging valuation hit a once almighty tech industry. The market for digital regulations in the EU is – in stark contrast – in a bullish mood. With the MiCA regulation almost ready, FTX’s collapse is showcased as the proof that a regulation is needed for crypto assets. The EU’s battle to tame the ‘digital wild west’ is far from finished.
© Adobe Stock/Nikita
FTX • The fall of FTX, a leading crypto asset exchange company still valued 32 billion dollars a few weeks ago, is closely followed by regulators in Brussels. The Bahamas-based company founded by Sam Bankman-Fried operated in the EU via licence in Cyprus, which has been suspended after the company filed for bankruptcy. Prior to filing for bankruptcy on 11 November, FTX held only 900 million dollars in liquid assets against 9 billion dollars in liabilities.
POLITICS • Supporters of (tougher) regulation of crypto and decentralised finance jumped on the bandwagon. Financial Services Commissioner Mairead McGuinness called FTX’s collapse a “wake up call”. “Such Lehman Brothers moments must be prevented in the crypto space. That's exactly what MiCA is for. Crypto assets are not play money. Crypto asset service providers must ensure internal risk management mechanisms” tweeted Stefan Berger, rapporteur of the MiCA regulation at the European Parliament.
MiCA • The aim of MiCA is to bring the unregulated crypto asset service providers (CASPs) under the more stringent regulatory regime applied to financial services. Most crypto activities are not “financial instruments” and therefore fall outside the scope of EU financial services regulations – i.e. are not subject to provisions on consumer protection and market integrity.
MiCA seeks to root out the risks of “fraud, hacking and marking abuse” to make the crypto world a safer world. It consists of three regulatory regimes.
For Initial Coin Offerings (ICOs), which aims to increase transparency on the market, notably through the mandatory publication of an information document — a white paper.
For CASPs, which will have to obtain a European license to operate within the bloc, where these service providers operated until now according to the rules applicable (or in the absence of rules) in each EU Member State.
A general regime for stablecoins. Stablecoins are crypto-currencies backed by traditional currencies such as the dollar or the euro, and their importance could become systemic.
JUST LIKE BANKS • In order to safeguard financial stability, crypto assets services providers will need to comply with new prudential requirements. “Just like banks, crypto asset service providers need mechanisms that ensure risk management”, Stefan Berger told The Block. MiCA prohibits the “co-mingling” of clients’ crypto assets with the firm’s own assets, to avoid liquidity crunches of the like experienced at FTX. MiCA also contains “the world’s first explicit rules to define and ban specific forms of market manipulation in digital assets”, according to Pinsent Masons, a law firm.
WHAT NEXT • The EU is in the later stages of implementing the Markets in Crypto Assets regulation, or MiCA, which will apply under the scrutiny of the European Securities and Market Authority (ESMA) and the European Banking Authority (EBA). The European Parliament’s ECON Committee and the Council of the EU agreed on the regulation in early October. A final vote is expected to take place at the European Parliament in February 2023.
The next steps are mainly administrative and linguistic, not political. At this stage, it is clear the FTX collapse will not influence the content of MiCA anymore. Commissioner McGuinness stated: “We will keep watching this area to see should we do more or indeed do something different, but for now we feel confident that what we have in place is effective”. The new rules should enter into force in 2024.
In Case You Missed It — Twitter, Schengen, Euro, Iran, International Summitry
TWITTER BLUES • The firing frenzy and numerous resignations that followed the takeover of the company by Elon Musk has ravaged Twitter’s headcount in the EU. Policy-makers and regulators have been struggling to communicate with Twitter over the last few weeks. Stephen Turner, the firm’s top lobbyist in Brussels, was among those fired on 14 November. Chief data protection officer (DPO) Damien Kieran has left the company.
Outside of the US, Twitter operates via an Ireland-based company. It can hence benefit from the GDPR’s ‘one-stop shop’ (OSS) which allows its compliance with the GDPR to be supervised only where the company has its ‘main establishment’. With the recent layoffs, the Irish Data Protection Commission (DPC) publicly questioned itself over whether Twitter still qualifies for the OSS provision. What would that mean? “Any EU data protection authority would be able to act directly on concerns it has that local users’ data is at risk”, explains Natasha Lomas, writing for TechCrunch. Instead of having the understaffed and tech-friendly Irish DPC decide over GDPR compliance, Twitter could be faced with an army of national regulators, i.e. costly and complex legal headaches for a slimmed-down company.
As the Digital Services Act entered into force on 16 November, online platforms such as Twitter have 3 months to report the number of monthly active users. Platforms for which this number exceeds 10% of the EU’s population – 45 million people – will have only 4 months to comply with the DSA’s obligations. Complying with the new DSA regulations will imply a lot of legal and technical work on Twitter’s side, which is a challenge with a slimmed down workforce. Even more so with Thierry Breton publicly stating that Twitter will need to add more moderators in the EU to comply with key provisions of the DSA. “He is in the process of reducing a certain number of moderators, but he will have to increase them in Europe”, Breton declared during an interview on French TV.
SCHENGEN BOOM • “The Commission calls upon the Council to take the necessary decisions without any further delay to allow Bulgaria, Romania and Croatia to fully participate in the Schengen area”, a Communication published by the Commission on 16th November reads, meaning that the Commission has acknowledged the progress made by the three states in applying Schengen rules.
EU home affairs ministers are expected to discuss the issue on December 8. However, it is far from certain that the three countries will join Schengen, as the decision must be taken unanimously. Last month, the Dutch Parliament adopted a resolution against Romania’s and Bulgaria’s accession to the passeport-free zone, expressing concerns about organised crime and corruption. Other countries such as Sweden might hold similar positions.
ECB WARNING • The ECB’s Financial Stability Review for November 2022 warned that the eurozone should brace for more instability due to a dangerous confluence of recession, skyrocketing inflation, rising funding costs, and decreased liquidity. ECB Vice President Luis de Guindos advised investment funds to keep more liquid assets, asked banks to make additional provisions for problematic loans, and said the ECB should remain cautious when reducing its five trillion euro bond stockpile next year. The ECB also stressed that financial assistance to vulnerable sectors by EU governments should remain targeted and not conflict with the normalisation of monetary policy.
IRAN SANCTIONS • EU foreign ministers agreed to broaden the EU’s sanction regime against Iran in an effort to hold those responsible for Mahsa Amini's death and the ruthless suppression of predominantly female demonstrators accountable. As they deal with the largest popular protest since the 1979 revolution, Iran's Islamist government and security apparatus are coming under increasing domestic and diplomatic pressure.
In a statement, the Council stated that four members of the team that arbitrarily detained Mahsa Amini, the provincial heads of the Iranian Law Enforcement Forces (LEF) and the Islamic Revolutionary Guards Corps (IRGC), as well as Brigadier General Kiyumars Heidari for their part in the brutal suppression of the recent protests were all added to the list of those subject to restrictive measures by the Council. Press TV, Iran’s state-run television, is also on the list.
SUMMITRY IN BALI • The EU attended the G20 Bali Summit, held in Indonesia on 15-16 November. Speaking on behalf of the EU, von der Leyen and Michel made strategic autonomy a central point of their declarations – no sofagate this time.
China was high on the agenda as the EU and the US insisted on the need to provide an alternative to the Belt and Road Initiative, cut over-reliance on China should be avoided. Xi Jinping engaged with EU Member States bilaterally, meeting with the heads of state of France, Germany, Italy, Spain and the Netherlands. Such diplomatic tensions took place as the EU is seemingly engaging in a decoupling strategy vis-à-vis China.
The EU also backed the non-binding Just Transition Partnership agreement, pledging to help Indonesia phase out of coal. Support will be provided as part of the Global Gateway initiative.
COP IS OVER • COP27 ended on 20th November, with mixed feelings from EU countries over the final deal.
Frans Timmermans, the EU’s negotiator at the COP, was a key mover during the summit where he tried to obtain tougher CO2 reductions in exchange for a promise on loss and damage cash for the most vulnerable countries, including least developed countries and small island developing states — a measure which had long been rejected by the EU and the US.
But on Saturday, Timmermans threatened to leave the summit, backed by other EU countries: “Our message to partners is clear: We cannot accept that 1.5C dies here and today”, he said. While the final deal announces the creation of a loss and damage fund, it does not raise emission reduction targets, as promised at Glasgow last year.
In other words, while progress was made on adaptation and loss and damage, no significant improvement was made in terms of climate change mitigation.
What we’ve been reading this week
The Financial Times has two articles on the enormous challenges European industry faces. If high energy prices are the top culprit, as Andy Bounds reports, the American Inflation Reduction Act (IRA) is also enticing companies across the continent to direct investments towards the United States.
For Bruegel, Alicia García-Herrero and Pauline Weil investigate what lessons the EU can draw from China’s state-led attempts at building a self-reliant semiconductor industry in the last decade.
In a paper for the Peterson Institute, Olivier Blanchard, Christian Gollier and Jean Tirole provide a critical sumary of the policy tools available to fight climate change.