Binance, the world’s biggest crypto exchange following the demise of FTX, will face its biggest test within the next 18 months as its licence to operate in France comes up for renewal under the European Union’s planned new markets in crypto assets regulation.
The final text of MICA is due to be published next month and will pose significant questions for Binance and EU regulators. The rules are expected to be much sterner than the current French market authority’s ones, and existing licences cannot be carried over or grandfathered into MICA.
“For me this is going to be the key test,” said Matthew Elderfield, former deputy governor of the Central Bank of Ireland, in a presentation at the Peterson Institute for International Economics. Elderfield was also chief risk officer of Nordea until March.
Applicants for regulation will have to produce an effective prospectus on what their business is and make sure their corporate governance and structure as well as their client asset protection procedures come up to scratch to satisfy regulators.
“The key benefit of this for firms will be to give them a passport to operate under the EU,” Elderfield said. However, if Binance failed to pass such a stringent test that would make it illegal to operate in the EU and pose questions about its credibility as a trusted counterparty for traders.
So far regulators have been split on how to regulate the once burgeoning crypto market. France was keen to make a start and many locations have wanted to forge a role as a hub for crypto operators.
But the broad split seems to be between whether firms can be regulated using existing securities or exchange rules, or whether a distinct regime might be needed. Elderfield said the UK and EU had now made the decision to set up specific rules.
In the US, the picture is more divided, with the SEC treating crypto as another type of security but the CFTC wanting to set up new rules to cover crypto exchanges such as FTX.
The Basel Committee said on Friday it hoped a global prudential standard for banks’ exposure to crypto assets would be in place by the start of 2025.
Elderfield said the key for EU regulators was “not to give exchanges licences until they had improved their governance. MICA will be a big shock for the crypto industry. I hope the competition for being Europe’s crypto hub will not lead to more lenient licensing.”
Binance has previously sought and failed to obtain authorisation by the UK’s FCA. It has done nearly US$5trn trades so far this year.
One financial regulatory lawyer said the efforts to regulate crypto seemed to be happening way too late, after many consumers had already got exposure to the assets. “It’s human nature to try and profit from money-making schemes and arguably consumers need protection,” he said.