The European Union plans to centralize the regulation of the cryptocurrency industry, which may disrupt the existing MiCA regulatory framework

The European Commission is pushing to centralize the regulatory authority of all cryptocurrency businesses under the European Securities and Markets Authority (ESMA), a move that could disrupt the efforts of member state regulatory agencies and companies in industry regulation for years.

According to a draft plan circulated before an official announcement by EU officials next month, the European Commission proposed that the European Securities and Markets Authority (ESMA) directly serve as the regulator for all crypto asset service providers operating in the EU and be responsible for authorizing new businesses.

If this concept is implemented, it would mean a shift in the EU's approach to crypto regulation from a decentralized national approval model to a more centralized unified regulation.

Currently, under the EU's 2023 Markets in Crypto-Assets Regulation (MiCA), cryptocurrency businesses must obtain authorization in at least one member state, which allows them to operate throughout the EU.

The implementation window for this regulation is expected to end next year, and the emergence of the new centralized proposal has immediately raised concerns in the crypto industry about legal uncertainty and delays in implementation.

Robert Kopitsch, Secretary-General of the industry lobbying group Blockchain for Europe, stated that restarting MiCA at this time would bring legal uncertainty, potentially delay the authorization process, and divert attention and resources from consistent implementation.

Major Regulatory Changes Ahead

According to the draft content, the European Commission's proposal would overturn the current MiCA authorization system.

Currently, regulatory agencies in European countries and numerous crypto companies have invested significant time and resources to adapt to the MiCA "passport" system. This system was designed to simplify cross-border operations through authorization from a single member state.

However, the new proposal would make ESMA the sole direct regulator and authorization body for all crypto asset service providers. This means that in the future, crypto companies entering the EU market may no longer deal with a national regulatory agency but will need to engage directly with ESMA.

The draft also notes that ESMA will retain the power to delegate tasks to national regulatory agencies when appropriate. However, this proposal is not the final version and must be approved by the European Parliament and the Council of the EU member states. The European Commission declined to comment on this matter.

Centralized Regulation Sparks Controversy

ESMA has expressed doubts about the performance of the existing national regulatory model.

In July of this year, the agency criticized the approval process of the Maltese regulatory authority, which has issued MiCA licenses to several crypto companies.

In September of this year, national regulatory agencies from France, Austria, and Italy called for ESMA to begin directly regulating large cryptocurrency companies, while smaller enterprises would continue to be overseen by local authorities. ESMA Chair Verena Ross stated in a media interview in September:

Looking back, you could question whether national regulation was the right decision, as it means that 27 national regulatory agencies need to prepare and build teams. At this stage, you can still ask: from an efficiency and cross-border perspective, does it make more sense to regulate at a central level?

Industry insiders have reported that national regulatory agencies have closer contact with businesses in their daily operations, which could complement ESMA's cross-border regulation Kopitsch stated that if the EU decides to explore a more centralized regulatory model in the future, it should be based on the specific experiences and evidence accumulated during the initial years of MiCA implementation. Andrew Whitworth, founder of consulting firm Global Policy Ltd., believes:

While the emerging market of crypto assets may be a good testing ground for ESMA to take on more responsibilities, changing the rules is a difficult time given the current implementation phase.

He added that ESMA needs more resources to take on the work that local regulatory agencies are responsible for