How the EU Is Preventing Fraud and What It Means for You The EU recently issued a comprehensive report on the "serious risks" across decentralized finance.
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In the aftermath of FTX and other financial scandals that rocked public markets, regulators are cracking down on fraud. While conversation on crypto regulation in the U.S. centers on the inevitable approval of a Bitcoin spot ETF, Europe is taking a more straightforward approach to stopping crime in this emerging market — which is good news for those who do business in the region.
The European Securities and Markets Authority (ESMA) — the EU agency tasked with establishing a landmark set of guidelines — recently issued a comprehensive report on the "serious risks" across decentralized finance.
"Although investors' exposure to DeFi remains small overall, there are serious risks to investor protection, due to the highly speculative nature of many DeFi arrangements, important operational and security vulnerabilities, and the lack of a clearly identified responsible party," said the organization while outlining a timeline for integrating EU countries and entities into its new guidelines.
ESMA's policy coincides with another noteworthy development this month: the formation of a "Crypto Trust Seal" by the Global Anti-Scam Alliance and the Netherlands-headquartered forensics firm, Crystal Blockchain. The initiative aims to establish "best practices" standards for the blockchain industry by creating criteria for crypto exchanges, lenders, and protocols.
"We're at a critical moment in global finance," according to Crystal's Director of Intelligence Nick Smart. "Criminals are able to create sprawling operations spanning multiple jurisdictions, with little accountability or oversight, while instantly having off-ramps for ill-gotten gains. At the core of this epidemic is a lack of a clear regulatory framework or agreed upon rules. The EU understands this, and is moving ahead with leveling the playing field."
While both the Crypto Trust Seal and ESMA are aimed at creating a proper set of incentive structures for large entities and governments, Smart says they will help everyday retail investors.
"Crypto in its current state is unusable for the average person," explains Smart. "Most projects are rife with fraud. The fall of FTX also highlights the dangers of contagion into other financial markets, impacting vulnerable people unaware their investments had exposure to crypto in the first place."
In the case of FTX, the Ontario Teachers Pension Plan in Canada invested $95 million of teacher's funds into Sam Bankman-Fried's house of mirrors. In Europe, meanwhile, some countries have already greenlit legislation allowing funds to allocate sizable client portfolio positions into crypto — Germany's "Fund Location Act," for example, grants pension funds and insurance companies the right to invest up to 20% of their portfolios into blockchain projects.
"Even despite massive black eyes over the past year, crypto is increasingly enmeshed in mainstream finance," explains Smart. "Outside the U.S. and Western Europe, crypto is also being adopted, becoming a go-to for cross-border payments and peer-to-peer transactions for those without access to traditional banking."
"Since very few jurisdictions are tackling this issue head on, it's important to watch the policy reforms being rolled out in Europe," adds the forensics expert.
