European Central Bank official warns of ‘gaps’ in upcoming crypto rules

The European Union’s incoming regulations on cryptoassets will allow some of the industry’s biggest players, including the exchange Binance, to escape stricter oversight and need to be overhauled, a senior representative of the European Central Bank has warned.

Elizabeth McCaul, a member of the ECB’s supervisory board, warned in a blog on Wednesday about “gaps in the framework” for regulating crypto markets and said traditional approaches to financial market surveillance may not work.

McCaul’s views reflect growing concerns in Europe over the region’s ability to oversee the crypto industry, which has been marred by several high-profile scandals in recent months, including last year’s collapse of exchange FTX.

In a challenge to Binance, the world’s largest crypto exchange which claims to have no formal headquarters, McCaul said such companies pose “challenges to our current regulatory and supervisory approaches”.

“No jurisdiction should allow entities to operate their business without disclosing their legal status and who is responsible for the business,” she said. “Even firms that claim to have no headquarters, like Binance, must be ‘supervised’.”

Her comment is a further sign of growing regulatory pressure on Binance after the US Commodity Futures Trading Commission filed a lawsuit last month against the exchange, accusing it of illegally serving US clients. The CFTC also cited internal communications that it said showed Binance knew the platform was enabling potentially illegal activities.

Binance argued that the complaint “appears to contain an incomplete recitation of the facts”, adding that it disagreed with “the characterization of many of the issues alleged in the complaint”.

The CFTC’s lawsuit came two days before the Financial Times revealed that Binance hid significant ties to China for years.

The EU has drawn up a comprehensive set of rules, known as the Markets in Crypto Assets (Mica) regulation, which is due to come into effect in 2024. McCaul said she was proud that the EU is “taking the first steps globally to provide oversight of the crypto world”.

Mica will strengthen governance, segregation of client funds and external audit requirements, she said, while warning “certain areas still need further strengthening”.

For cryptoasset service providers to be considered significant under Mica and therefore supervised by the European Banking Authority in conjunction with the ECB, they must have at least 15 million active users in Europe – a threshold that McCaul said would likely be missed by Binance and FTX, before it collapsed. Smaller crypto providers will be monitored by national EU authorities.

She suggested that the threshold should be adjusted to take account of different business types and be measured “at group level rather than at individual unit level”. Stricter rules and improved oversight should apply to crypto groups classified as significant, which they do not under Mica, she added.

Cryptogroups often have opaque structures that cross many national borders. McCaul said regulators needed to monitor them at the group level to identify conflicts of interest and “opportunities for regulatory arbitrage.”

Her concerns build on those already expressed by other top European regulators. ECB supervisor Andrea Enria had warned that crypto platforms posed a “major consumer protection problem” because they did not respect national borders. EBA chairman José Manuel Campa praised Mica but admitted there were blind spots in the package.

Binance is also trying to convince US regulators to green light a deal that would allow Binance US, the company’s US subsidiary, to buy the assets of Voyager Digital, a crypto company that went bankrupt last year. The agreement is under review by the Committee on Foreign Investment in the United States, a government body that determines whether foreign investments pose a national security risk.

Binance did not immediately respond to a request for comment.