EU Regulatory Body Takes Aim at 'Opaque' Crypto Firms in MiCA Compliance Drive

Police & Regulations
Oct 20, 2023 at 08:00 am

The European Securities and Markets Authority (ESMA) has raised red flags regarding the potential for global crypto companies to exploit regulatory discrepancies, branding them as "intricate and opaque." They caution that some of these entities may seek to operate through EU-based shell corporations even after the enactment of the Markets in Crypto Assets regulation (MiCA).

ESMA has issued a directive to major global crypto entities, advising them to promptly commence preparations for MiCA. This counsel comes as national regulators hasten to outline the procedures that will facilitate the attainment of a coveted crypto license for exchanges and wallet service providers.

Although the MiCA license regulations are slated to be enforced from December 2024, companies can continue their operations without a full license until July 2026 if they are registered under existing, less rigorous national anti-money laundering frameworks. This approach has already been adopted by companies such as Binance in France and Coinbase in the Netherlands.

ESMA expresses concern that this interim provision might lead to confusion among the very clientele that MiCA aims to assist, potentially enabling companies to exploit divergences among national regulators.

They noted:

 "Opaque organizational structures may also create challenges for clients in discerning which entity they are transacting with and its regulatory standing."

Furthermore, ESMA highlighted that certain established crypto enterprises may lack a robust compliance ethos. Their substantial scale and global reach afford them significant flexibility in choosing operational jurisdictions, thereby heightening the risk of conflicts of interest, regulatory arbitrage, and an imbalanced competitive landscape.

In practice, the onus of enforcing these rules falls on national regulators. ESMA underscored the importance of preventing the establishment of so-called 'letterbox' entities, which would allow foreign providers to operate within the EU without maintaining substantial operational footprints.

While MiCA lays down consistent regulations across the EU, affording companies the opportunity to conduct business with a unified license, it also provides some latitude to national regulators in terms of implementing transitional measures or delineating exceptions for decentralized networks.

This has raised concerns that certain nations may endeavor to undercut the rules to bolster their own competitiveness. ESMA Chair Verena Ross has voiced her reluctance to witness "forum shopping" in the quest for the most lenient regulatory jurisdiction. Last year, attention was drawn to countries like Cyprus, whose regulator had sanctioned FTX's operations within the EU before its collapse in November 2022.

Even though the final MiCA rules are yet to be finalized, meaning that in many cases, crypto firms are not yet eligible to apply for licenses, ESMA has implored them to commence the process of apprising regulators and clients of their intentions. They have also urged regulators to expedite the finalization of procedures.

ESMA recommended that national authorities should "establish authorization procedures and engage in discussions with potential applicants at the earliest opportunity." This hints at the possibility of an informal pre-screening process even before companies formally submit their license applications.

ESMA embarked on consultations regarding detailed MiCA rules in July, with Ross emphasizing that there will be "no such thing as a safe crypto-asset," even after the rules come into effect.

Read more: European Market Watchdog Flags Significant Risks in DeFi Ecosystem

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