Chair of the Malta Financial Services Authority (MFSA)
IN recent years we have witnessed the rapid evolution of crypto markets, both across Europe and globally.
With 83% of institutional investors planning to increase allocations to digital assets in 2025, according to research undertaken by EY-Parthenon, this trend looks set to continue.
To ensure that Europe can capitalise on the growth of this novel and dynamic sector, while at the same time managing the associated risks, the European Union (EU) developed regulation accordingly in the form of the Markets in Crypto-Assets (MiCA) Regulation, which became fully applicable on 30 December 2024.
The move put Europe in a strong position to attract operators that can benefit from accessing the largest single market in the world, while ensuring that high standards are met across the bloc. The subsequent appetite for licenses has been significant. Since January 2025, some 86 Crypto-Asset Service Providers licenses have been issued by 12 countries.
MiCA
Built into MiCA and its supporting efforts are various mechanisms to facilitate convergence and collaboration between member states, which is widely recognised as essential to mitigating supervisory arbitrage. Current frameworks already provide for supervisory coordination, through colleges for multinational banks and asset managers, and supervisory convergence through peer reviews.
These avenues for collaboration and convergence support best practice across the region while at the same time respecting national regulatory autonomy. They also maintain sufficient flexibility to account for local contexts, leverage existing in-market expertise, and safeguard space for the kind of innovation that has been central to the success of the sector to date.
Nonetheless, there are those who would like to go further and feel that centralisation, rather than convergence, is required. Under this scenario oversight would be entrusted to a supranational authority. Advocates for this position contend that this is the best way to ensure consistent enforcement, with some going further to say that national supervision is less effective in mitigating risks. Additionally, it has been argued that a centralised approach could enable the region to benefit from economies of scale over time.
Centralisation downsides
However, there are several potential downsides to centralisation, as well as serious question marks regarding its necessity at this point in time. Chief among these is that such a move could end up harming supervisory efforts. Risks differ across EU member states, and local regulatory authorities are often better equipped to monitor CASPs.
Through seven years of prior experience supervising digital assets, the Malta Financial Services Authority (MFSA) has seen first-hand the value of supervision that is responsive to local conditions and, as such, believes that tailored approaches frequently allow for more effective risk management when it comes to digital assets. This way it is possible to leverage local expertise to deliver customised supervision, while at the same time ensuring compliance with the requirements of MiCA.
Another important consideration is the impact such a move could have on efficiency and innovation. Transferring oversight to a supranational authority may create delays and impose disproportionate burdens that threaten to undermine the innovation and competition that has been fundamental in the development of the sector to date.
As a dynamic and fast evolving sector, it is critical that Europe strikes the right balance. The resources and capacity building that would be required to effectively support a move to centralisation should also not be underestimated.
Proportionality
For many the most compelling argument against centralisation at this stage in the process, however, is adherence to the principles of subsidiarity and proportionality, which are enshrined in the Treaty on the European Union and as such represent constitutional requirements for the bloc.
Subsidiarity requires that decisions should be made at the national level unless it can be demonstrated that a supranational body would be more effective, whereas proportionality necessitates that EU actions should not exceed what is necessary to achieve Union objectives.
Given that the authorisation and supervision of crypto assets under MiCA has only recently commenced and that there have been no significant failures of CASPs in the region to date, it seems reasonable to contend that national oversight remains both appropriate and sufficient in line with the principles of subsidiarity and proportionality.
Pitfalls
The question is therefore how do we avoid the potential pitfalls of centralisation whilst also ensuring that collaboration and convergence deliver for the region? At this early stage of MiCA implementation, it seems prudent to focus efforts on advancing convergence in the first instance. Here, the ongoing work of the European Securities and Markets Authority (ESMA) and its Digital Finance Standing Committee to promote supervisory convergence and monitor issues such as regulatory and supervisory arbitrage is of central importance.
Greater collaboration among national financial supervisors, guided by ESMA, and the ongoing development and application of mechanisms such as standardised guidelines, supervisory briefings, training programs to enhance knowledge sharing, systematic peer review processes, and common supervisory actions, serve as a solid basis for ensuring the region has a robust approach that preserves the flexibility required for effectively navigating the complexities of the sector.
Fostering convergence
As the recently concluded ESMA Peer Review on CASP Authorisation and Supervision has demonstrated, these are valuable tools in fostering convergence and informing efforts to collectively raise the bar across the region that must be fully supported and openly and constructively engaged with.
Ultimately, supervisory effectiveness with a view to achieving investor protection and market integrity in the context of the internal market is the EU’s primary goal. Achieving centralisation will require significant time to agree upon and implement, and as argued in this article, it does not guarantee improved supervisory effectiveness— which is urgently needed now. Therefore, rather than focusing on centralisation as the pathway to effectiveness, we should concentrate on supervisory convergence, which can achieve the desired effectiveness more readily, utilising existing tools and frameworks.
In committing to a process of continuous learning, fostering innovation and building trust among financial supervisors through convergence, Europe now has an exciting opportunity to develop and nurture the very best practices in financial supervision that remain responsive to the evolving dynamics of digital assets.
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