What went wrong? Again!

Since last week, the entire crypto sphere is in turmoil: FTX one of the largest centralised crypto- exchange has filed under Chapter 11. New rumours have also emerged in relation to Crypto.com solvability another major centralised platform, and this comes after this summer Luna/Terra meltdown. What went wrong? Again! Going through all the material posted so far, it seems that once again we face the same issues, whereby client money and funds have been mixed with the firm assets to close a shortfall of liquidity stemming from defective risk management practices. It is sad to see that principles developed over the years on the back of financial crises and malpractices are once again disregarded to supposedly foster innovation. Whilst innovation is welcomed and should be promoted, it cannot thrive and bring progress by denying basic investor rights, overlooking minimum operating standards to ensure orderly markets, and overriding the overarching need for financial stability.   All this could have been fixed and still can by abiding to some well-established principles:
      • Safeguarding client’s assets and funds as enounced in Art. 2 to 8 of the MiFID II Delegated Directive that require a full segregation between firms’ assets and clients’ assets underpinned by deposing those assets and funds with a third party
      • Risk management practices: addressing relevant risks (e.g., liquidity, credit and counterparty, interest rate, market, settlement, intermediation) including remuneration risks drawing inspiration from the principles highlighted in IFD/IFR or CRD by implementing robust and effective procedures
      • Conflicts of interest management: implementing robust and effective policies and procedures to protect investors interests and avoid intra-group mismanagement
      • Prudential and operational framework: having sufficient capital and adequate systems and controls to ensure the continuity and sustainability of the provision of financial services as highlighted in MiFID II
  While too many operating rules can stifle innovation and slow the emergence of new players, disorderly developments and successive industrial incidents that could have been avoided contribute to mistrust and drives investors away, further delaying widespread adoption of digital assets including embracing the underlying technology. Its time to take a collective responsibility and voluntarily preempt the regulatory framework entering into force within the next  few months (e.g., MICA, Pilot Regime), including when none is planned for yet (e.g. DEFI, NFTs) and or seeking existing full authorisation when available (e.g. DASPs), by showing that things can be and are different as most industry stakeholders are socially and economically responsible and wish to develop sound and robust business models meant at contributing to the democratization of financial markets and fostering inclusion. Robust governance frameworks exist and can already be adhered to (e.g. EBA guidelines on internal governance). Regulatory arbitrage is a thing of the past, transforming regulatory requirements (existing or to be) into commercial benefit is the only way forward. It starts TODAY.
by Caroline Michel, Director
  Contact us for more information on how we can help you in designing sound and robust internal processes and/or seek an agreement/authorisation. You can also visit Our impact page to learn how we have helped our clients to achieve their objectives.