FTX collapse a ‘wake up call’ for crypto investors, says Mairead McGuinness

EU commissioner doubts turmoil will change EU crypto regulation proposals

The dramatic collapse of leading exchange FTX is a “wake-up call” for crypto that should spur a reassessment of whether all aspects of decentralised finance (DeFi) are “positive”, EU financial services chief Mairead McGuinness has said.

The Irish commissioner, who is spearheading regulation of the crypto space with the MiCA [Markets in Crypto-Assets] package of regulations set to be rolled out in the next 18 months, said little could be done by EU authorities to help those who were unable to withdraw their holdings from the exchange.

“It is very much a wake-up call for those who felt that crypto was the future,” Ms McGuinness told The Irish Times. “I think it’s really a steadying moment for crypto. They will need to regain investor trust if that is possible.”

A downturn in crypto began earlier this year, she said. “People should have been wary about the risks that were building up, and those who were investing I think should have been very clear that this is a non-regulated area, it is high risk.”

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Ms McGuinness said she did not see the FTX collapse leading to tweaks to the EU’s MiCA package, which is set to regulate the crypto industry and falls under her remit as the commission’s financial services and financial stability chief.

The regulations set out that crypto-asset service providers must be licensed to operate in the EU, that stablecoin providers should hold ample liquidity reserves, and stipulate protection for consumer wallets and liability for providers if assets are lost.

Will the FTX affair lead to any adjustments to the package? “No, because what we’ve done with MiCA we believe is sufficient,” said Ms McGuinness.

“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.”

Having passed a key vote in the European Parliament last month, the rules are set to be implemented in 12 months and in 18 months for exchanges, she said.

However, the FTX collapse could have implications for the future of decentralised finance, the commissioner suggested.

A fast-growing corner of the crypto market that regulators have struggled to keep pace with, decentralised finance refers to the use of blockchain technology and crypto assets to offer financial services, such as peer-to-peer lending or futures contracts.

“Decentralised finance is now one of the big talking points of the future. We would see computers and algorithms taking the place of people and institutions in the transaction of money and payments, shares etc,” said Ms McGuinness.

“Maybe the events of this year in crypto should make us all sit up a bit and try to understand what parts of decentralised finance may not be positive, and what parts we would like to see happen,” she cautioned.

“When there’s a run on money on a virtual system it can happen instantaneously, and investors don’t see it, it’s just over, your money is gone.”

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Asked if consumers and businesses who found themselves unable to withdraw their assets from FTX could be helped to recover losses, Ms McGuinness said options were limited.

“I don’t think that arises, because there was no regulation in place, there is no — like in the banking system — a guarantee scheme.”

Ms McGuinness suggested this was partly by design.

“Many in the crypto space did not want to be part of the traditional financial system,” she said. “They saw the evolution of technology as really marking the disintegration of traditional finance and all of the various intermediaries in that traditional system. And there is no structure to provide for where a problem arises and people lose their money.”

On the broader economic picture, Ms McGuinness said the outlook is “riddled with uncertainty”.

The commission’s most recent economic outlook for the EU forecasted the bloc would tip into recession this winter and warned of potential disorderly adjustments in the financial system due to rising interest rates.

Ms McGuinness declined to get into details about where she saw the greatest risks within the system but said warnings were “prudent” as it is “wise to be alert to potential problems.”

It’s important “to be very mindful and watchful of where pressures might come in our financial system, in order that we’re alert rather than complacent”, she said. “There is no complacency.”

Naomi O’Leary

Naomi O'Leary

Naomi O’Leary is Europe Correspondent of The Irish Times