ESMA’s initial analysis of the implications that FTX’s collapse might have on crypto-assets market

The European Securities and Markets Authority (ESMA) published their latest newsletter for November 2022, #ESMA “Spotlight on Markets”, in which there is a reference on the opening statement of Steffen Kern (ESMA Head of Risk Analysis and Chief Economist), who described the implications of FTX collapse within the European Union (EU).

The analysis and observations within the opening statement have been conducted based on public information about the matter, as FTX was neither regulated nor supervised by ESMA and the latter do not have access to any particular information beyond what is publicly available.

While briefly summarizing the FTX case from a regulatory perspective, ESMA concluded in the following considerations:

1. Segregation of client assets is a crucial safeguard not only in traditional finance but in crypto markets as well. Back in 2018 and also the current year, ESMA issued relevant warnings about the risks involved in crypto-assets.
2. Crypto-assets experience huge volatility in prices due the risks involved in holding them such as market, liquidity and operation risks; ESMA explains that crypto-assets have raised concerns around the potential of ML/FT criminal activities, and market manipulation.
3. Lastly, the widespread and often aggressive marketing of crypto-assets to the mass market without disclosing the extreme risks involved may affect consumers’ judgement.

ESMA notes that FTX’s collapse amplify evidence that the crypto-assets market might have very weak corporate governance and controls.

Taking into consideration all the mentioned fundamental risks involved in crypto-assets markets, ESMA pointed out that its concerns around those risks were the basis of the rationale for the implementation of MiCA Regulation. The utmost matter of urgency for ESMA is the implementation of protections and rules around crypto-assets market so to achieve the protection of investors and market participants.

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