October 17, 2023 at 11:57 GMTModified date: October 17, 2023 at 11:57 GMT
October 17, 2023 at 11:57 GMT

EU crypto firms should prepare for upcoming MiCA regulation: ESMA

European Union regulators have raised an alarm about the potential for international cryptocurrency firms to exploit legal loopholes across member states.

The EU. Pic: Unsplash

European Union regulators have raised an alarm about the potential for international cryptocurrency firms to exploit legal loopholes across member states. 

In a statement from the European Securities and Markets Authority (ESMA), it warned that “complex and opaque” crypto firms could take advantage of the differences in regulations among countries, operating essentially from outside the EU through shell companies.

ESMA has now told crypto firms to begin preparation for the upcoming regulation, as the EU has plans to implement a drastic new framework in the coming years.

MiCA regulation concerns

The concerns come as the crypto industry awaits the Markets in Crypto Assets (MiCA) regulation, a set of rules designed to govern the sector. 

However, officials from ESMA are worried that interim provisions could mislead the consumers that MiCA aims to protect, letting companies leverage the inconsistencies among national regulators.

ESMA has advised crypto businesses to start preparing for MiCA’s implementation immediately. However, national regulators are still outlining the specific procedures that cryptocurrency exchanges and wallet providers must follow to acquire official crypto licenses.

Navigating the MiCA transition

Set to be in full effect by December 2024, MiCA outlines new comprehensive rules for the crypto industry. 

However, firms like Binance and Coinbase, registered under the existing national anti-money laundering frameworks, can keep functioning without a full license until July 2026. 

This leeway is a double-edged sword, according to ESMA officials, as it could potentially muddle the understanding for customers and open doors for regulatory exploitation.

In the recently released statement, ESMA voiced concerns that some crypto firms don’t emphasise compliance and use their international presence to dodge regulatory constraints, leading to possible conflicts of interest. 

It highlighted the risk of “letterbox” entities, companies that are registered in the EU but operate elsewhere, essentially avoiding proper regulatory oversight.

The MiCA regulation aims for consistency, letting firms operate across the EU with a single license. However, it also allows national regulators some discretion in transitional arrangements or exceptions for decentralized networks, which could lead to inconsistencies.

ESMA said it now “encourages market participants to make adequate preparations that will reduce the risk of disruptive business model adjustments”.

Discussing next steps, the regulators said: “ESMA and NCAs will continue pursuing initiatives to support and promote supervisory convergence during the MiCA implementation and transitional phases.”

ESMA added that it will work with crypto firms and participants when moving forwards with its plan. 

Letter from ESMA’s chair

Verena Ross, the chair of ESMA, released a letter on the same day as ESMA’s statement, stressing the need for coordinated regulations for crypto-assets within the EU. 

Ross acknowledged: “While the MiCA Regulation is a welcome step forward, it will not provide the same level of investor protection as exists for traditional financial investment products, nor will it enable mitigation of all the significant risks linked to crypto-assets.” 

She expressed concern over “forum-shopping,” where crypto firms might migrate to jurisdictions within the EU with the most favorable regulations, thereby avoiding stricter oversight. 

Ross said there was a need for “smooth implementation of the MiCA rulebook and a swift onboarding of authorised entities”.