The European Commission has proposed a significant overhaul of its financial regulatory framework, aiming to extend the powers of the European Securities and Markets Authority (ESMA) to cryptocurrencies and broader financial markets. This move is part of a broader effort to narrow the competitive gap with the United States and create a more centralized and cohesive regulatory environment within the European Union.
Background and Rationale
The proposal, released on Thursday, would grant ESMA “direct supervisory powers” over key parts of the market infrastructure, including crypto asset service providers (CASPs), trading venues, and central counterparties. This would strengthen ESMA’s coordination role in the asset management sector and bring its oversight powers more in line with those of the US Securities and Exchange Commission (SEC).
The European Commission’s move is driven by concerns about the fragmentation of EU capital markets and the need to increase wealth creation among EU citizens. According to the Commission’s report, the market capitalization of stock exchanges accounted for only 73% of EU GDP in 2024, compared to 270% in the US. This disparity underscores the need for a more competitive and integrated financial market in the EU.
Implications and Industry Response
Industry observers have raised concerns that ESMA’s expanded oversight could slow innovation, particularly among smaller crypto and financial technology (fintech) companies that rely on closer cooperation with domestic regulators. “Fully centralizing authorization and oversight within ESMA would require enormous human and financial resources,” which would “slow down decision-making and innovation, especially among newer players,” Faustine Fleuret, head of public affairs at decentralized lending protocol Morpho, told Cointelegraph.
However, the proposal has also been welcomed by some as a necessary step towards creating a more robust and effective regulatory framework for cryptocurrencies and financial markets in the EU. The move follows growing criticism of Malta’s crypto licensing system and concerns about more lenient regulations in some jurisdictions.
Revisions to MiCA and Passporting
France, Austria, and Italy have supported revisions to the European Crypto Assets Market Regulation (MiCA), including stricter rules for crypto activity outside the EU, stronger cybersecurity oversight, and a review of the regulation of new token offerings. The three EU countries have also threatened to block the “passporting” of European licenses acquired by member states, creating gaps in the enforcement of MiCA.
Previous Proposals and Developments
The idea of creating a “European SEC” was first proposed by European Central Bank (ECB) President Christine Lagarde in 2023. Lagarde suggested that expanding ESMA’s powers could be the answer to mitigating systemic risks and creating a more comprehensive regulatory framework. “Creating a European SEC, for example by expanding ESMA’s powers, could be the answer. It would need a comprehensive mandate, including direct supervision, to mitigate the systemic risks of large cross-border companies,” Lagarde said at the European Banking Congress in November 2023.
The proposal is currently being negotiated in the European Parliament and the Council, and its adoption would mark a significant step towards creating a more centralized and effective regulatory framework for financial markets in the EU. For more information, visit https://cointelegraph.com/news/eu-proposal-centralize-crypto-financial-markets-esma?utm_source=rss_feed&utm_medium=rss_tag_regulation&utm_campaign=rss_partner_inbound
