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

The European Commission is pushing to centralize all cryptocurrency business regulatory powers to the European Securities and Markets Authority (ESMA), a move that could overturn years of efforts by member state regulators and companies in industry oversight.

According to a draft plan circulating before the official announcement next month, the European Commission proposes that the European Securities and Markets Authority (ESMA) become the direct regulator of all crypto asset service providers operating in the EU, and take charge of authorizing new businesses.

If implemented, this concept would mean the EU shifts from a decentralized, country-based approval model in crypto regulation to a more centralized unified oversight.

Currently, under the EU’s 2023 Markets in Crypto-Assets Regulation (MiCA), crypto companies must obtain authorization in at least one member state, allowing businesses to "passport" across the entire EU.

The implementation window for this regulation is expected to end next year, while the new centralization proposal comes to light at this time, immediately sparking industry concerns over legal uncertainty and delays in enforcement.

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

Regulatory Upheaval Looms

According to the draft, the Commission’s proposal would overturn the current MiCA authorization framework.

Currently, national regulators and numerous crypto firms across Europe have invested substantial time and resources to adapt to MiCA’s “passporting” system, which was designed to simplify cross-border operations through the authorization of a single member state.

However, the new proposal would make ESMA the sole direct regulator and licensing authority for all crypto asset service providers. This means that in the future, crypto companies entering the EU market may no longer interact with national regulators but will need to approach ESMA directly.

The draft also notes that ESMA would retain the power to delegate tasks to national regulators under appropriate circumstances. But the proposal isn’t final and must be approved by the European Parliament and the EU Council. The Commission declined to comment.

Centralized Regulation Sparks Debate

ESMA isn’t convinced by the performance of the current national regulator model.

In July this year, the body criticized Malta’s regulatory approval process, which had issued MiCA licenses to several crypto companies.

In September, national regulators of France, Austria, and Italy called for ESMA to begin direct oversight of large crypto companies, while smaller firms should continue under local jurisdiction. 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 meant 27 national regulators had to prepare and build teams. At this stage, you can still ask: From an efficiency and cross-border perspective, is it more reasonable to regulate at the central EU level?

Industry participants report that national regulators are closer to businesses in day-to-day operations and can complement ESMA’s cross-border supervision.

Kopitsch said that if the EU explores a more centralized regulatory model in the future, it should be based on concrete experiences and evidence gathered from the early years of MiCA implementation. Andrew Whitworth, founder of consultancy Global Policy Ltd., believes:

While the emerging crypto market may be a good test ground for ESMA to take on more responsibility, considering the implementation phase, it’s a difficult time to change the rules.

He added that ESMA needs more resources to take on the work handled by local regulators.

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