EU Commission Proposes ESMA Crypto Oversight Expansion, Sparking Innovation Concerns

European Commission Seeks to Bolster ESMA's Role in Crypto Oversight

In a move aimed at narrowing the competitive gap with the United States, the European Commission has proposed expanding the powers of the European Securities and Markets Authority (ESMA) to include crypto assets and broader financial markets. The package, published on Thursday, would transfer “direct supervisory competences” for key pieces of market infrastructure, including crypto-asset service providers (CASPs), trading venues, and central counterparties, to ESMA, while also strengthening its coordination role in the asset management sector.

The proposal now awaits approval from the European Parliament and the Council, where it is currently under negotiation. If adopted, ESMA’s role in overseeing EU capital markets would more closely resemble the centralized framework of the US Securities and Exchange Commission.

Back in September, France became the third European country to advocate for ESMA, based in Paris, to assume supervision of major crypto firms, following Austria and Italy's securities regulators. This followed mounting criticism of Malta’s crypto licensing regime. In July, ESMA released a peer review of the Malta Financial Services Authority’s authorization of a crypto service provider, concluding that the regulator only “partially met expectations.”

Concerns over more lenient regulations in certain jurisdictions have also led France to threaten blocking the “passporting” of European licenses obtained from member states, highlighting enforcement gaps related to Europe’s Markets in Crypto-Assets Regulation (MiCA).

The three EU nations have also supported revisions to MiCA, including stricter rules for crypto activities occurring outside the EU, enhanced cybersecurity oversight, and a review of the regulatory framework for new token offerings.

ESMA Leadership Sparks Innovation Concerns

Industry observers have expressed worries regarding the potential impact of ESMA’s expanded supervision on innovation, particularly for smaller crypto and financial technology (Fintech) companies that rely on close collaboration with local regulators.

Faustine Fleuret, head of public affairs at decentralized lending protocol Morpho, noted, "Centralizing authorization and supervision entirely within ESMA would necessitate substantial human and financial resources," potentially "slowing down decision-making and innovation, especially for emerging players.""

The broader package aims to enhance wealth creation for EU citizens by fostering greater competitiveness within the bloc's capital markets. In 2024, the market capitalization of stock exchanges represented only 73% of the EU's GDP, compared to 270% in the US, according to a European Commission report.