European Union regulators on Tuesday warned that “complex and opaque” global crypto companies could try to exploit differences among member states, saying that some may try to operate from overseas via EU-based shells even after its landmark Markets in Crypto Assets regulation (MiCA) takes effect.
The European Securities and Markets Authority (ESMA) on Tuesday told major global crypto firms to start preparing for MiCA now, even as national regulators race to design the procedures that will let exchanges and wallet providers gain a coveted crypto license.
MiCA license rules take effect in December 2024, but companies can continue operating without a full license until July 2026 if they are registered under an existing, lighter-touch national money laundering regimes – as has been done by the likes of Binance in France and Coinbase in the Netherlands.
ESMA officials are now worried that the interim provision could confuse customers MiCA is seeking to aid, and allow companies to exploit differences among national regulators.
“Opaque group structures may also render it difficult for clients of service providers to know which entity they are dealing with and its regulatory status,” ESMA said in a statement today, adding that some existing crypto companies “may lack a strong compliance culture … and their large scale and geographic scope allow them to maintain a high level of agility in terms of where they can operate, increasing the risk of conflicts of interest, regulatory arbitrage and an unlevel playing field.”
National regulators, who will, in practice, implement the rules, should “prevent the establishment of so-called ‘letterbox’ entities” that allow foreign providers to operate in the bloc without having real staff or substantial operations there.
In principle, MiCA sets the same rules across the bloc, allowing companies to do business with a single license – but it also offers some leeway for national regulators in how to apply transitional measures, or how to define an exception for decentralized networks.
That has, in turn, raised fears that some countries could seek to undercut the rules to boost their competitiveness – and ESMA Chair Verena Ross has already said she doesn’t want to see “forum shopping” to find the laxest jurisdiction. Last year, EU lawmakers’ attention turned to countries such as Cyprus, whose regulator had approved FTX to operate within the bloc before its November 2022 collapse.
Though final MiCA rules aren’t yet nailed down – meaning that in many cases, crypto firms won’t be able to apply for licenses yet – ESMA urged them to start informing regulators and clients of their intentions, and also called on regulators to finalize procedures as a matter of urgency.
National authorities should “establish authorization procedures and foster dialogue with potential applicants as soon as possible,” ESMA said, raising the prospect that there could be some kind of informal pre-screening process even before companies make formal license applications.
ESMA began consulting on detailed MiCA rules in July, with Ross warning that there’d be “no such thing as a safe crypto-asset” even after the rules take effect.