Regulators from the European Union issued a warning on Tuesday, stating that “complex and opaque” international crypto firms may attempt to take advantage of regional differences by operating from EU-based shell businesses even after the historic Markets in Crypto Assets Act (MiCA) goes into effect.Even as national regulators scramble to create the procedures that would help exchanges and wallet providers obtain a sought-after crypto license, the European Securities and Markets Authority (ESMA) on Tuesday urged large global crypto firms to start preparing for MiCA now.
MiCA license regulations go into effect in December 2024, however businesses can operate until July 2026 without a complete license if they are registered under one of the nation’s current, less stringent anti-money laundering laws, as has been done by companies like Binance in France and Coinbase in the Netherlands.
Officials from ESMA are now concerned that the temporary provision may cause customers to get confused, which MiCA is trying to avoid, and may allow businesses to take advantage of regional regulatory variances.
“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.”
The development of “so-called “letterbox” entities” that permit foreign providers to operate in the bloc without having real staff or significant operations there should be prevented by national regulators, who will actually apply the rules.MiCA, which allows businesses to operate with a single license and in theory sets the same standards throughout the bloc, also gives national authorities considerable latitude in how to implement transitional measures or create an exception for decentralized networks.
This has led to worries that certain nations may try to undermine the rules in order to increase their competitiveness. ESMA Chair Verena Ross has previously stated that she does not want to see “forum shopping” in order to pick the jurisdiction with the laxest laws.Last year, EU parliamentarians focused on nations like Cyprus, whose regulator had given FTX permission to operate inside the Union prior to its collapse in November 2022.Although the final MiCA rules haven’t been set in stone, many crypto firms won’t be able to seek for licenses just yet. ESMA advised these companies to start notifying regulators and clients of their plans and urged authorities to expeditiously conclude the procedures.
National authorities should “establish authorization procedures and foster dialogue with potential applicants as soon as possible,” ESMA said,suggesting the possibility that a pre-screening procedure could exist before businesses submit official license applications.There is “no such thing as a safe crypto-asset” even after the laws are in place, Ross cautioned when ESMA started consulting on the specific MiCA rules in July.