‘The path to hell is paved with good intentions’, a policy-maker told OMFIF, as European Union institutions get ready to again tackle a notorious lacuna in Europe’s single market: financial services.
Recent regulatory skirmishes on the supervision of cryptoasset service providers have offered an amuse-bouche for Europe’s latest attempt to create a single financial market. The savings and investment union initiative, another stab at capital markets union, would help mobilise the €800bn per year deemed missing in former European Central Bank President Mario Draghi’s warning about the lack of capital investment in the EU.
Initial reports ahead of the policy announcements suggest the focus is on centralising the supervision of crypto firms, central securities depositories and other aspects of market infrastructure.
Using similar logic to the supervision of significant banks under the European Central Bank and European Banking Authority, which evolved after the 2012 euro area crisis revealed the inadequacy of national oversight, the proposed package contends that the ‘European Securities and Markets Authority should handle authorisation and supervision of [cryptoasset service providers], while delegating tasks to [national competent authorities] and cooperating under [the Markets in Crypto-Assets Regulation]’.
‘Firms without CASP authorisation remain under NCA supervision, but oversight transfers to ESMA once they grow significantly’. These significant CASPs, or ‘s-CASPs’. would be determined by a combination of size, importance and market activity criteria.
Too good to be true?
While this variable arrangement for banks seems to have successfully protected the sector from further crises, it hasn’t facilitated a single market for them, as the wrangle over UniCredit’s acquisition of Commerzbank demonstrates.
Informed commentators have told OMFIF the enlargement of ESMA would cost in the tens of millions of euros, which, the proposal says, ‘CASPs ‘will cover’. But key officials have suggested that such a move will achieve the opposite of strengthening Europe, rather it will throttle badly needed innovation in an industry of the future. They are also dreading the re-opening of MiCA, which didn’t foresee a central regulator, and which is already the sub-optimal product of member state horse-trading.
The CASP scene, meanwhile, remains in its infancy. A national regulator told OMFIF that centralised supervision was ‘unfitting’ and ‘not a recipe for everything’ at a time when ‘modular, agile’ approaches might be better. Critically, the regulator said it would very likely be ineffective at enforcement compared to NCAs. It would also probably reflect the views of the largest companies with the best lobbyists in an industry where Europe would benefit from the fostering of innovative start-ups.
Members of the European parliament, member state representatives and portions of the central banking community continue to regard stablecoins, for example, as American ‘crypto mercantilism’, to be countered by regulatory caution and the acceleration of ‘payment multilateralism’ anchored in central bank digital currencies and digitalised commercial bank money. Quite a few other central bankers, smaller member states and key European Commission officials regard that as a false dichotomy.
Stability at the cost of flexibility
The debate mirrors the prudential tension seen elsewhere in EU financial architecture. Under Basel III’s output floor, global systemically important banks in Europe face higher capital requirements than US peers, while MiCA’s reserve rules reproduce a similar rigidity by forcing issuers to park 30% to 60% of reserves in EU credit institutions.
This creates a cycle of regulatory conservatism that aims to deliver stability but instead locks stablecoin issuers into the very banking exposures that the model was meant to sidestep, since mandatory deposits concentrate risk in a narrow set of domestic balance sheets and reduce the flexibility that a reserve structure should provide. In moments of fiscal strain, particularly when sovereign spreads widen, these structural interlinkages could reverberate through domestic banks’ funding bases and into stablecoin reserves – an overlooked risk.
A neat solution would be the wider availability of euro-denominated ‘safe assets’ as collateral or reserves, issued by the EU itself, as it did under the groundbreaking Next Generation EU programme. Initial hope that this post-Covid-19 economic stimulus initiative was a Hamiltonian moment that tip-toed the EU towards fiscal union, complete with liquid treasury market, has been disappointed so far as Germany in particular resists its extension.
Another answer would be closer alignment or equivalence with the US framework under the Genius Act. The European financial sector is already materially American, due to a mixture of the long shadow of the 2008 financial crisis and the failure of banking union. A step in that direction for stablecoins via a ‘multi-issuance’ capacity was fiercely resisted, however.
What does effective regulation look like?
Meaningful banking and capital markets unions have both foundered in the past on irreconcilable national interests and legal systems. Europe-wide joint and several deposit insurance, a prosaic first step to an integrated bank market, remains off-limits due to– arguably clichéd – northern suspicions of southern fecklessness. Bankruptcy law harmonisation, which would significantly boost the viability of a single market for capital, is devilishly difficult. The Commission is consulting on an Italian proposal to tackle this through the ‘28th regime’. But a major Eurosystem central bank at a recent OMFIF roundtable quickly dismissed these rudimentary and fundamental areas as out of scope.
Single supervision of CASPs, meanwhile, looks like an easier ask since the industry is too new for entrenched vested interests. The French, Italian and Austrian NCAs recently volunteered centralisation. There is unease among others. In addition to the expected reluctance from smaller member states, Germany is said to be seeking to exclude them from the general move to centralise supervision.
A euro-denominated stablecoin company regulated by BaFin, Germany’s Federal Financial Supervision Authority, told OMFIF that it hopes this will be the case, cautious as it is of oversight by ESMA. Nor was this motivated by the pursuit of laxity. BaFin, trepidatious of another Wirecard debacle, is not considered a crypto soft touch. It regulates more CASPs than any other European NCA and has been doing so since 2020.
Effective regulation depends as much on proximity as on principle. NCAs’ day-to-day engagement with firms allows faster, more informed responses to market developments, while ESMA’s role in ensuring convergence and cross-border consistency remains central. Together, these levels of supervision can achieve an effective balance between local insight and EU-wide coherence. MiCA already equips ESMA and NCAs for this arrangement.
Mind the gap
The Digital Operational Resilience Act, which keeps ICT risk management and continuity planning squarely with NCAs, adds an overlooked complication, several NCAs and industry participants told us. If ESMA supervises s-CASPs while NCAs remain responsible for operational resilience, then incidents may fall into a gap where neither authority has the full picture, raising practical questions about how ESMA can conduct meaningful oversight or threat-led penetration testing at a distance.
The Maltese regulator, recently challenged by the French one, suggests a middle path with ESMA at the centre of a knowledge-sharing arrangement, while cleaving to subsidiarity for supervision. This would avoid ‘bureaucratic inefficiencies… to the detriment of cryptoasset markets’ that fail to account for national diversity in investor knowledge and risk appetite, and instead foster a ‘nuanced and responsive approach’ that cultivates a ‘competition of best supervisory practices’.
Many historians have attributed Europe’s cultural, intellectual and industrial successes to rivalry between similar but unidentical neighbours.
The centre of power within Europe is evolving
The driving force for the SIU initiative in the European Parliament, Aurore Lalucq, a member of the socialist corpus of MEPs and chair of the Economic Committee, challenged the Autorité des Marchés Financiers’ certification of Binance in her home country, calling it ‘incomprehensible’. Several observers, including NCAs, have told OMFIF that the centralisation push is designed to herd supervision into agencies specifically based in France.
Others have suggested to OMFIF it is displacement for the fiscal and political problems at home. Taking a birds-eye view, Europe’s regulatory (and industrial centre) is increasingly coming under economic strain. The Franco-German core, once the undisputed axis of integration, now faces stagnant growth, rising fiscal pressures and political fatigue, while the so-called periphery – Poland, Czechia, Croatia and the Baltics – has become the growth engine of the Union.
This inversion challenges old assumptions about who makes and who takes the rules. In this light, the SIU and broader moves towards centralised supervision might appear as acts of norm entrepreneurialism rather than purely technocratic exercises – France and its allies seeking to institutionalise regulatory centrality precisely as their economic leverage wanes.
A paradox of integration
It remains to be seen whether the work to move supervision from NCAs to a central authority, including the attendant cost and effort to acquire the necessary expertise while forsaking it in local markets, will boost Europe’s economy and therefore its resilience. Other steps to a more effective union, such as qualified majority voting instead of unanimity for key Council decisions, or efforts to create a single market for defence, remain in the realm of unachievable treaty change. Europe is damned in the meanwhile to centralise what it can and probably shouldn’t.
What emerges, therefore, is a paradoxical model of European integration: centralising supervision in areas that are still nascent while leaving unresolved those such as fiscal union, sovereign-debt coordination or deposit insurance that would genuinely underpin resilience. The periphery’s rise, coupled with the centre’s overreach, signals a deeper rebalancing of Europe’s political economy.
If the Union’s industrial strategy is to remain credible, it must reconcile these shifts by fostering innovation and decentralised initiative rather than perpetuating a bureaucratic pull towards Paris or Frankfurt. Otherwise, the SIU risks becoming both symbol and symptom of Europe’s wrong kind of centralisation.
A more pragmatic path for Europe may therefore lie not in further centralisation but in cultivating the strengths already embedded in its supervisory mosaic.
John Orchard is Chairman of OMFIF’s Digital Monetary Institute. Erwin Voloder is Director of Research and Strategy at Blockchain for Europe.
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