TLDR
- The European Commission has proposed expanding ESMA’s powers over crypto and financial markets.
- The proposal aims to narrow the competitive gap between the EU and the US.
- ESMA would gain direct supervisory control over crypto-asset service providers and trading venues.
- France, Italy, and Austria support giving ESMA more authority to oversee the crypto sector.
- Concerns over regulatory gaps in EU member states have led to calls for more centralized supervision.
The European Commission has unveiled a proposal to expand the powers of the European Securities and Markets Authority (ESMA) over crypto and broader financial markets. This proposal aims to narrow the competitive gap between the EU and the US. If approved, ESMA would gain direct supervisory powers over key market infrastructures, including crypto-asset service providers (CASPs) and trading venues.
Expanded Supervisory Role for ESMA
Under the new proposal, ESMA will assume direct supervisory control over important market players, such as crypto firms and central counterparties. This includes overseeing crypto-asset service providers (CASPs), a growing segment of the financial market. The aim is to provide a centralized framework for EU capital markets that mirrors the US Securities and Exchange Commission (SEC).
The move comes after increasing concerns regarding the regulatory gaps between EU member states. France, Italy, and Austria have expressed support for ESMA’s broader role, arguing that a more unified approach would streamline supervision.
“A centralized framework could ensure consistency in market regulation across the EU,” an EU official stated.
Criticism of National Regulatory Systems
The call for ESMA’s expanded role follows criticism of Malta’s crypto regulatory framework. In July, ESMA reviewed Malta’s supervision of a crypto service provider and found that the Malta Financial Services Authority “partially met expectations.” Critics argue that more lenient rules in certain EU countries create enforcement gaps, allowing firms to bypass stricter regulations.
In response to these concerns, France has threatened to block the “passporting” of licenses issued by member states with less stringent rules. This could prevent firms from operating in other EU countries if their home country’s regulation is deemed too lax. Several EU countries, including France, support changes to the EU’s Markets in Crypto-Assets Regulation (MiCA), advocating for stricter rules and enhanced cybersecurity measures.
While centralizing supervision under ESMA is seen as a step towards consistency, some argue it could hinder innovation. Industry experts caution that a unified supervisory body might slow decision-making processes. “It could demand vast resources, slowing down innovation, especially for smaller firms,” warned Faustine Fleuret, head of public affairs at decentralized lending protocol Morpho.
The proposal also includes provisions for enhanced oversight of new token offerings and crypto activities outside the EU. The EU has faced criticism for lagging behind the US in capital market development. According to the European Commission, the market capitalization of stock exchanges in the EU currently stands at only 73% of the region’s GDP, compared to 270% in the US.
A Step Toward Strengthening EU Capital Markets
The European Commission aims to make EU capital markets more competitive by strengthening ESMA’s role. By improving supervision, the Commission hopes to create a more attractive environment for investment and market growth. The proposal’s adoption could boost the EU’s global position in financial markets, offering greater oversight and regulatory consistency.
Despite opposition from some industry players, the proposal has strong backing from several EU member states. These nations see it as an opportunity to address discrepancies in the current regulatory landscape. However, the proposal still requires approval from the European Parliament and the Council before it can be implemented.
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