Crypto firms have learned to shop around for the lightest rules in Europe. A licence in one member state can open the door to the entire EU market, turning the bloc’s weakest regulatory link into everyone’s gateway.

Companies can operate across Europe with a licence from just one member state. But the regulators watching them are still largely national. That mismatch is becoming harder to ignore as the crypto industry grows. The experience may provide exactly the impetus Europe has long been looking for to turn its ambition of a truly integrated financial market into reality.

In July, the European Securities and Markets Authority (ESMA) launched a review of how crypto companies manage the risks involved in holding customers’ assets. The exercise will look at how firms keep assets secure, control transactions and respond when something goes wrong. It is part of a bigger effort to make supervision of a rapidly growing, cross-border industry more consistent across Europe.

Spotlight on fragmented supervision

The fragmented crypto model has long caused concern. The providers often register in countries with the lightest rules, Malta or Cyprus in particular. Once authorised in one country, they can use the bloc’s passporting system to offer services across the entire bloc.

While the EU’s Markets in Crypto-Assets regulation (MiCA), which began applying in stages from 2024, created a common rulebook for the sector, the supervision still lies with national authorities. The result is a European market where the gatekeepers remain national.

In a paper published earlier this year, the European Central Bank identified crypto-asset service providers as a sector that needs EU-level supervision as the businesses are inherently cross-border. Of 94 providers authorised under MiCA at the time, 62 planned to operate in at least seven member states. And of those 62, 47 intended to operate across the entire EU.

In April, the European Central Bank (ECB) formally backed proposals to give ESMA direct supervisory powers over certain crypto providers.

Governments are already divided

Germany, France, Italy, Spain, the Netherlands and Poland have been coordinating their positions and broadly support strengthening ESMA, calling for it to become a “true European supervisor”.

But not all EU capitals are convinced. Smaller financial centres such as Ireland and Luxembourg have traditionally been more wary of transferring supervisory powers to ESMA.

Cyprus, which at the time still held the rotating EU presidency, said member states raised concerns about the “proportionality” of directly supervising all crypto providers. They suggested a compromise giving ESMA responsibility for the largest or “significant” providers, while leaving smaller, purely local firms under national supervision.

Test case for the Savings and Investments Union

The disagreement over crypto may in fact be a test case for one of Brussels’ biggest economic ambitions: to make it easier for the vast amounts of money saved by Europeans to flow into companies and investments across the bloc, rather than remaining trapped in national markets. To achieve the Savings and Investments Union (SIU), the ECB has argued that supervision is equally important.

The SIU is one of Brussels’ biggest economic ambitions: to make it easier for European savings to reach companies and investments across the bloc, helping businesses access more capital and making European markets more competitive. “Fragmented capital markets and fragmented supervision are a tax on competitiveness that we impose on ourselves,” ECB president Christine Lagarde said in July.

But governments’ reluctance to give ESMA responsibility for all crypto providers, a sector Brussels considers inherently cross-border, may be a harbinger of how cautious they will prove about handing the authority sweeping powers elsewhere.

Giving ESMA more power raises another question

Then there is another complication for Brussels: the authority it wants to strengthen is itself facing questions about whether it is ready for the job.

ESMA is expected to grow substantially as it takes on new responsibilities. But a recent staff survey raised concerns about management and decision-making at the organisation.

Only 34 per cent of respondents said decisions were made objectively and transparently. Less than a half, 44 per cent, thought the management team set a good example. Giving an authority substantially more power while questions remain about how it is run may not sit comfortably with everyone.