How crypto car crash FTX got EU licence two months before its financial freefall Two months before its financial freefall

Currency exchange went from the ‘most regulated in the world’ to a farcical descent into bankruptcy.

‘Securing this license in the EU is an important step in achieving our goal of becoming one of the most regulated exchanges in the world’

‘Britain is the very best place in the world to start and scale crypto companies’

Sam Bankman-fried enjoyed preaching about how he maintained high regulatory standards at his crypto exchange FTX. In mid-september it secured a licence to operate in the EU, from Cyprus, and its 30-year-old founder declared: “Securing this license in the European Union is an important step in achieving our goal of becoming one of the most regulated exchanges in the world.

“We are continuing to work with [Cypriot regulators] and regulators across the globe to be the leader in the digital asset industry when it comes to meeting the financial standards that are expected of traditional financial institutions.”

Less than two months later, those claims look increasingly farcical with FTX in collapse and Bankman-fried having resigned in disgrace.

FTX’S main international exchange held just $900m in easily sellable assets against $9bn liabilities the day before it collapsed into bankruptcy.

The fiasco has shone a spotlight on how regulators have tied themselves in knots in attempting to supervise a “wild west” industry that has spent heavily to market itself to the mainstream – FTX’S name has been emblazoned on Lewis Hamilton’s Mercedes in Formula One.

In trying to expand FTX’S global footprint, Bankman-fried turned to Cyprus as a window into the EU – a country that has become notorious as a magnet for those seeking a “few questions asked” financial regime. Now, the Mediterranean nation is backpedalling fast and questions are being asked in Brussels about how FTX could have been granted an EU licence less than two months before it imploded.

After occasional claims that postbrexit Britain could pose a threat to the bloc’s financial stability, the EU is now being forced to do some soul searching of its own following the FTX debacle.

Instead of welcoming Bankmanfried’s three-year-old company with open arms like Cyprus, the UK’S Financial Conduct Authority (FCA) instead issued warnings about the crypto exchange. In September, days after it was granted a licence to operate in the EU, the City watchdog warned UK consumers against dealing with the company.

The FCA said the Bahamas-based exchange appeared to be offering products and services in the UK without its authorisation, adding that consumers should be “wary of dealing” with it.

It added: “This firm is not authorised by us and is targeting people in the UK. You will not have access to the Financial Ombudsman Service or be protected by the Financial Services Compensation Scheme (FSCS), so you are unlikely to get your money back if things go wrong.”

The regulator declined to comment on whether FTX applied for a licence to operate in the UK.

Despite Rishi Sunak’s efforts to make Britain a global crypto hub and “the very best place in the world to start and scale crypto companies”, the FCA’S cautious approach to granting crypto licences appears to have paid off for British consumers, at least in the short-term.

In the US, too, there is growing clamour for tough regulation. Larry Summers, a former US Treasury Secretary, compared the collapse of FTX to the infamous Enron fraud. He added: “What’s going on in crypto in the last few days is going to scare

‘Through focusing on the technology sector, we aim to build a new pillar of the economy that will give social prosperity’

‘When you’re talking about risk management with them, they think of IT security only; they never think about financial risks’

people and is going to scare regulators into action.”

FTX is reportedly under investigation by the US Securities and Exchange Commission, Justice Department, and Commodity Futures Trading Commission.

In Cyprus, however, politicians and officials have welcomed these companies with open arms.

In June, Kyriacos Kokkinos, Cyprus’ deputy minister for research, innovation and digital policy, outlined plans for an “umbrella” cryptocurrency bill to attract digital asset companies to the island nation.

At the time, he said: “What we see as an opportunity for Cyprus and what we’re working on is to develop a new pillar of our economy.

“Through focusing on the technology sector, especially on new and disruptive technologies, like fintech and blockchain, we aim to build a new pillar of the economy that will give economic competitiveness and social prosperity.”

He added: “Because we are members of the European Union, we will have to be very careful.

“We don’t want to run ahead and regulate something then the European Union comes forward in a year with a different point of view.”

Rival exchange Binance has recently been given a licence to offer crypto services in the country alongside other trading and fintech businesses, including etoro, CMC Markets and Revolut.

When Revolut – which also has a crypto licence in the UK – earned its Cypriot licence in August, a spokesman for the company said: “In establishing a hub for our crypto operations in the EU, we recognise that [the Cyprus Securities and Exchange Commission] has in-depth knowledge of crypto and its efforts to be a leader in crypto regulation.”

Now, the FTX fiasco has left CYSEC scrambling to limit the damage and, on Friday, the regulator suspended FTX Europe’s licence on suspicion of alleged violations of several laws.

It stated that “the company does not appear to comply at all times” with the conditions of its authorisation, accusing it of other alleged violations including failure to comply with conditions of its authorisation, the suitability of members of management and safeguarding of client assets. The securities regulator said it hopes to “preserve assets and stabilise the company”.

The collapse of FTX has also left Brussels with a headache. In June, the bloc agreed a single regulatory rulebook for its market, but it will not come into force until 2024.

Last week, Andrea Enria, chair of the European Central Bank’s supervisory board, warned that regulators will struggle to oversee crypto providers, accusing them of “never think[ing] about financial risks” and posing “a huge consumer protection issue”.

He told the Financial Times: “I am concerned for my colleagues that will have to perform this supervision in the future because these are animals with whom it is difficult to engage.

“When you’re talking about risk management with them, they have a different mindset. They think of IT security only; they never think about financial risks, so I don’t know how our toolbox will work with these types of animals.”

Enria added that one of the major challenges was pinning down where many crypto asset providers were based. FTX’S public filings have shown a sprawling web of subsidiaries registered across the globe, including in the Bahamas, Cayman Islands, Antigua and Barbuda.

Bankman-fried’s claims to be holding FTX to the highest regulatory standards now looks as solid as the company’s balance sheet.

As experts warn of wider “contagion” in the crypto industry, officials in Brussels will be investigating how FTX was able to win a licence to operate on the Continent and whether they need to rebuke the Cypriot regulator that gave it the green light.