The EU is creating a "European version of the SEC" to unify regulation of stock and Crypto Assets exchanges?

In the wave of financial globalization, a unified and strong regulatory system is often the key for regional economies to enhance their international competitiveness. Recently, the financial decision-making circles in Brussels and Frankfurt are brewing a landmark reform that could reshape the European financial landscape: the plan is to significantly expand the powers of the European Securities and Markets Authority (ESMA), transforming it into a central regulatory agency with functions similar to those of the SEC, directly overseeing stock and Crypto Assets exchanges within the EU.

This move is not only a key step in the EU's ambitious blueprint for the “Capital Markets Union,” but also a proactive response to the potential loopholes in the “Regulation on Markets in Crypto Assets” (MiCA). However, this reform, which centralizes power, brings both the dawn of improved efficiency and deep concerns about the sovereignty of member states and the innovative vitality of startups.

Driving Force for Reform

For a long time, the most significant pain point in the EU financial market has been its “fragmented” regulatory landscape. Currently, the 27 member states operate independently, each with its own regulatory agencies and standards. This means that a financial institution or startup wishing to operate cross-border within the EU, such as by going public or offering Crypto Assets services, must contend with the divergent approval processes and regulatory requirements of each country, significantly increasing compliance costs and time, and weakening the attractiveness of European capital markets compared to the United States.

Christine Lagarde, President of the European Central Bank (ECB), pointed out this issue insightfully back at the European Banking Congress in November 2023, where she publicly called for “a European SEC with comprehensive powers to directly regulate the market.” She believes that a central institution with direct regulatory authority is an effective solution to reduce the systemic risks that large cross-border financial institutions may pose.

The MiCA regulations, which will be fully implemented in December 2024, serve as a direct catalyst for this reform. MiCA introduces an innovative “passporting” system, allowing Crypto Assets service providers (CASP) to operate freely throughout the EU as long as they obtain an operating license in any member state. While this is intended to promote market liquidity, it also raises concerns about “regulatory arbitrage.”

Specifically, operators may deliberately choose to apply for licenses in countries with more lenient regulatory standards and lower thresholds (such as Malta and Cyprus), and then use their “passports” to enter large markets with strict regulations, such as France and Germany. This kind of “rent-seeking” behavior not only undermines fair competition but may also create regulatory arbitrage, weakening the overall trust in the market. In response, French financial regulators have issued warnings to Brussels and, along with countries like Austria and Italy, publicly called for the large-scale and systemically important crypto asset providers to be directly regulated by the ESMA based in Paris to ensure consistency and effectiveness of regulatory rules.

ESMA empowerment

Under the push of multiple parties, the European Commission is actively preparing to officially propose a reform draft. According to the information currently disclosed, the core content of the draft will be to centralize the direct regulatory authority over key financial infrastructures such as stock markets and crypto assets exchanges from national regulatory bodies to ESMA.

ESMA Chair Verena Ross also confirmed this direction, emphasizing that transferring more financial regulatory powers to ESMA is to address the ongoing fragmentation in European capital markets and is an inevitable step towards the goal of a “Single Capital Market.” If the draft is successfully published, the EU Council and the European Parliament will immediately begin lengthy negotiations and consultations, with the entire legislative process expected to extend until 2026. This provides market participants with a relatively clear expected timeline.

With the expanded powers of ESMA, its responsibilities will not only cover traditional stock exchanges but will also bring all Crypto Assets Service Providers (CASP) and related trading infrastructures under its direct supervision. In addition, the draft may also grant ESMA the authority to make legally binding direct rulings in disputes in areas such as asset management, making it a truly “super regulator.”

For companies operating in Europe, especially for startups seeking growth, this reform is undoubtedly a double-edged sword.

On the positive side, a unified regulatory system will bring significant benefits. Firstly, the administrative and compliance costs for multinational operations are expected to be significantly reduced, with an estimated average decrease of about 15%. Companies will no longer need to deal with multiple sets of regulations, and the process for listing and fundraising will become more streamlined and transparent. Secondly, a strong and unified regulatory image can effectively enhance investor confidence, thereby attracting more venture capital into the European market, which aligns with the EU's goal of promoting technological development as outlined in the “European Innovation Act.”

However, from another perspective, stricter and “one-size-fits-all” unified standards may also become a burden that early startups find difficult to bear. Many startups have limited resources in their early stages, and excessively high compliance thresholds could stifle their innovative vitality, resulting in a dilemma of “diseconomies of scale.” Some industry players have expressed concerns that this may force them to relocate their business to jurisdictions with more relaxed regulatory environments (such as Switzerland, Singapore, or Dubai), thus posing the risk of “innovation outflow” for Europe.

In addition, the concerns of member states about the weakening of “regulatory sovereignty” are also a significant political obstacle that this reform must face. Finding a balance between centralization and the autonomy of each country will be the most challenging issue in the legislative consultations over the next two years.

Focus of Observation

With the imminent release of the European Commission's draft, the global financial markets will closely monitor the subsequent developments of this reform. The key points of observation for the coming years can be summarized in three aspects: Matching resources and capabilities: Can the ESMA secure sufficient financial budget and professional manpower to effectively support its vast enforcement functions across 27 countries, covering both traditional and Crypto Assets sectors? A resource-deficient regulatory agency will significantly undermine its authority. The art of political coordination: To what extent are member states willing to compromise on regulatory sovereignty? The political wisdom of Brussels will be severely tested in this multi-party game. The practical effectiveness of reforms: Under the dual impact of the MiCA regulation and the expansion of ESMA's powers, will startups and investors truly benefit from the promised low costs and high transparency? The final outcome of the reforms will be the only criterion for evaluating their success or failure.

Overall, transforming ESMA into a central regulatory authority similar to the SEC is an ambitious step taken by the EU to improve its capital markets and embrace the digital financial era. Regardless of the outcome, this attempt by the EU will provide a highly valuable reference model for other economies around the world in addressing the regulatory challenges posed by the integration of Crypto Assets and traditional finance. The whole world is waiting to see how this financial giant from the EU will chart a clear and steady course in its next legislative journey.