The Rock Trading: bankruptcy in Italian style

The Rock Trading, a historic exchange in Italy, has suspended its operations: at present, users cannot trade or withdraw their funds.

Officially, the website page refers to “difficulties encountered in liquidity management.” Which can mean anything: did you run out of money? Did you forget the combination to the safe where you keep it? Do you have so much that you don’t really know what to do with it?

There had been some warning signs when users for several weeks experienced increasing difficulties and delays in withdrawing their funds. Then, suddenly, the terse announcement on the website’s homepage.

Very little is known about the details of this crisis: the information found on the web does not go beyond the obvious fact of the closure of the platform’s operations, and, on the other hand, the company’s management has let little or nothing leak out. Users and investors remained in the dark until the last moment.

At present, it is impossible to understand what events and causes, corporate or governance, led to the sudden closure of one of the longest-running and (apparently) most reliable exchange platforms in Italy and Europe.

But this is not the place for investigations or speculation about the company’s financial management: that kind of analysis will be taken care of by specialized analysts. Certainly the problem is not related to the nature or characteristics of the crypto assets that the platform traded.

However, this is where we reason about issues of legal and legislative relevance.

The Rock Trading affair gives rise to considerable legal reflections on crucial issues. Some of them we have already made, on the occasion of the FTX case and other major platforms that ended up in insolvency situations.

Even though we do not yet know the background of the affair that affected the Italian platform (and with it, thousands of blameless users), there is a common thread that inevitably unites all these cases of unexpected bankruptcies.

Why did The Rock Trading go bankrupt?

The first consideration is that these crashes, quite obviously, have nothing to do with the volatility of crypto assets, nor with the decentralized nature of traded assets.

This is because volatility is irrelevant where an exchange derives its income from fees on exchanges. It does not matter whether the price of a certain asset goes up or down.

The second consideration is that the decentralized nature of the object of exchange transactions is also completely irrelevant, because in reality an exchange platform is a centralized entity, i.e., an intermediary.

Going by exclusion, the problem must be sought on aspects of corporate and financial management of resources and in the governance of the company.

To use a metaphor, if the ship went straight over a reef, it matters little whether it crashed there because there was an honest mistake in the course calculation or because the entire crew was dancing drunk on the deck without paying attention to the rudder.

The point is that the vessel was steered in the wrong direction; it is not as if it gave out its hull because of a design error or because the materials used in its construction were of poor quality.

Now, stepping out of the metaphor, the crux of the matter lies in the fact that in the quagmire of laws and regulations there are almost no measures taken to date to protect users and savers who relate to and rely on centralized exchanges, such as might be, among the many, Binance or Coinbase, but also like those swept up in storms and bankruptcies, such as FTX and, of course, most recently, The Rock Trading.

No one has ever imposed on these types of intermediaries any particular requirement of professional reliability or in terms of capital guarantees to enter the market, and even more so to be able to target a market of non-professional investors. Nor were specific conduct obligations or forms of supervision and control imposed on the proper use of funds entrusted by savers, and so on.

And all this in spite of all those bigwigs at central banks and supervisory and regulatory bodies who publicly in recent times have been tearing their hair out with regard to the volatility of cryptocurrencies, their lack of underlying value and their supposed anonymity, since those very top figures could have done so much more to ensure that concrete and effective safeguards and protection measures were taken in favor of users.

In a nutshell, a lot of press releases, a lot of talk, but very little action.

What about regulation to protect savers?

Now, if we take a case like that of The Rock Trading, there is indeed food for thought: first of all, we are talking about a platform that was duly registered in the dedicated register established at the OAM, in application of the provisions of the AML law and the implementing legislation adopted by the MEF in early 2022.

This demonstrates that, net of all the hype, admission to the register guarantees absolutely nothing, whether on the quality front or on the reliability of the operators. Being listed on it protects nothing and no one. It only triggers the obligation to report to the tax authorities the names and surnames of those who engage in cryptocurrency trading.

It also gives one pause for thought that, throughout the process of adopting the legislation implementing the requirements that later led to the implementation of the OAM registry, it was precisely The Rock Trading that was one of the most active operators in the interlocutions with bodies and institutions called upon to prepare the draft measures.

Another thing known to those who work in the environment, is that the company would put important resources in the field, appointing professionals of clear reputation for the specific purpose of initiating and actively managing institutional relations at the parliamentary and majority level, to prepare drafts of regulatory texts and arrive at the approval of a law on the tax treatment of cryptocurrencies.

Thus, we are talking about a historic platform, which has been operating at a high level, side by side with legislators, supervisors and regulators, and the like on the institutional level.

Yet, this epitome of solidity and reliability (at this point, only apparent), overnight simply closed its doors and blocked user assets, without providing any explanation other than a generic reference to liquidity problems.

It was a rude awakening for those who might have had it in their minds that the world of centralized exchange and trading platforms had embarked on a path to look increasingly like the world of conventional banking and financial brokerage services.

And those who might have had this kind of vision, unless they had in mind something akin to the pilgrimage route to Santiago de Compostela, had better digest the idea that it will still be a long road ahead.

The necessity of the MiCA

And to be fair, this journey will probably only really begin when MiCA, the European regulation on cryptographic assets, is finally approved. And it may be true that this regulation will have already been created outdated and full of loopholes (first and foremost on DeFi and NFTs), but it is the first major piece of legislation imposing on cryptographic asset service providers (CASPs) requirements necessary to operate in the European market and significant conduct obligations.

Whether all of this will be enough to avoid nightmares like FTX or The Rock Trading remains to be seen: after all, we have seen far too many traditional banks gone belly up, despite all the elaborate system of regulations, controls and supervision.

Nonetheless, at least it’s a start.

Besides, it makes sense for operators offering services on crypto assets to be aware of the fact that if you really want to be essentially a bank, then it is also only fair that you should accept its rules and limitations.