Centralizing crypto: Why Malta’s clash with ESMA is about more than one small state

European Union leaders are debating a proposal to transfer direct supervision of the largest crypto-asset service providers (CASPs) from national regulators to the European Securities and Markets Authority (ESMA). This shift aims to create a more unified approach to crypto regulation across the bloc, but has sparked debate among member states regarding the optimal structure for oversight.

Arguments for Centralization

France, Austria, and Italy are strong proponents of the proposed centralization. In a joint paper, their market authorities argued that a stronger European framework with centralized oversight is necessary to address significant differences in how countries authorize crypto firms and to prevent regulatory arbitrage. The European Securities and Markets Authority (ESMA) already leads supervisory convergence efforts and believes a single supervisor for major cross-border companies would lead to more efficient and harmonized supervision, enhance investor protection, and reduce forum shopping.

Concerns Over Centralization

Malta, through its Financial Services Authority (MFSA), has expressed reservations, deeming it "premature to introduce structural changes" like centralized supervision. The MFSA argues that the Markets in Crypto Assets Regulation (MiCA) has only recently become fully applicable, and its market impact is still being assessed. Ian Gauci, involved in Malta's original crypto rulebook, stated that Malta's concerns are not jurisdictional but relate to the structure and behavior of the framework itself. He suggests that centralization should be targeted at genuinely systemic cross-border firms rather than a blanket solution for uneven supervision.

Impact of MiCA and Passporting

The debate is critical because MiCA allows companies authorized in one EU member state to passport their services across the entire EU. This feature makes the question of supervision paramount, influencing the balance between market integration, investor protection, and national regulatory autonomy. The effectiveness of this passporting mechanism hinges on consistent and robust supervision across all member states.

Specific Cases and Regulatory Effectiveness

An ESMA peer review of a Maltese CASP authorization, reportedly for OKX, found that while Malta met supervisory settings expectations, the firm's authorization "should have been more thorough." Supporters of centralization point to such instances as evidence for the need for a unified supervisor. However, OKX's European CEO, Erald Ghoos, countered that the exchange has been supervised by Malta under a high-standard regime since 2021 and its MiCA authorization was not an expedited process. He suggested that the push for centralization might be a "political decision" rather than a response to demonstrated failures in the current model.

Structural and Strategic Considerations

Concerns have also been raised about the potential fragmentation of oversight. Ian Gauci warned that splitting supervision across ESMA, national authorities, and the Anti-Money Laundering Authority (AMLA), while DORA requires an integrated view of IT risk, could lead to a loss of unity and fragmented accountability. He questioned whether Europe prioritizes supervisory depth or scale, fearing that stripping away national expertise too quickly could lead to a loss of incentive for jurisdictions to invest in supervisory capacity, potentially encouraging firms to move offshore.