EU Regulatory Revolution! Following the US SEC to unify regulation of encryption and exchange.

According to the Financial Times, the European Commission plans to propose in December a centralized regulation of exchanges, Crypto Assets exchanges, and clearing houses under one entity, modeled after the U.S. Securities and Exchange Commission (SEC). The EU's move aims to establish a “Capital Market Union” to allow small financial startups to expand internationally more easily without the need to obtain approvals from numerous regional and national regulatory bodies.

Capital Market Alliance and Single Regulatory Authority Plan

(Source: Financial Times)

According to a recent report by the Financial Times in the UK, the European Commission plans to propose in December a proposal to centralize the regulation of exchanges, crypto asset exchanges, and clearinghouses under a single entity modeled after the U.S. Securities and Exchange Commission (SEC). This initiative, known as the “Capital Markets Union,” is one of the most significant reforms in the EU's financial regulatory framework, aimed at fundamentally changing the way financial services operate within the EU.

The core motivation for establishing the “Capital Market Alliance” is to reduce regulatory barriers for cross-border financial services. Currently, a fintech company or cryptocurrency exchange wishing to operate in multiple EU member states must obtain permission from each country's regulatory authority separately. This fragmented regulatory structure leads to high compliance costs and lengthy approval processes, making it difficult for small startups to compete with large financial institutions that have ample legal resources.

The establishment of a single regulatory body will fundamentally change this situation. Once approved by the central regulatory authority, financial service providers will be able to offer services across the entire EU, known as the “single license system.” This model has already proven effective in the United States, where the SEC's unified regulation has made the U.S. capital market one of the most liquid and competitive markets in the world. The EU hopes to replicate this success and enhance its position in global financial competition.

For the cryptocurrency industry, this proposal holds special significance. The EU's Markets in Crypto-Assets Regulation (MiCA) was passed in 2023, establishing a unified regulatory framework for crypto assets. However, the implementation aspect remains fragmented among national regulatory bodies. If cryptocurrency exchanges are brought under the jurisdiction of a single regulatory authority, it will truly achieve integrated regulation from legislation to enforcement, which has profound implications for the industry's development.

Controversies and Supporters of the ESMA Empowerment Plan

The report points out that one proposal is to expand the powers of the existing European Securities and Markets Authority (ESMA) to cover important cross-border financial entities such as exchanges, Crypto Assets companies, and other post-trade infrastructures. However, this proposal is considered “quite controversial.” ESMA is currently mainly responsible for coordinating the work of national securities regulators but does not directly supervise market participants. Transforming it into a super-regulator with direct enforcement powers would be a fundamental shift in the power structure.

European Central Bank President Christine Lagarde and her predecessor Mario Draghi both support this move. Lagarde has long advocated for deeper integration of EU financial markets, believing that a fragmented regulatory structure hinders the development of the European capital market, causing European companies to rely excessively on bank financing rather than capital markets. Recently, Reuters reported that Lagarde also supports Germany's call to establish a single European exchange.

Lagarde's support adds significant political capital to this proposal. As the President of the European Central Bank and former Managing Director of the International Monetary Fund, she wields enormous influence in European political and financial circles. Draghi's endorsement is equally important; not only did he serve as the President of the European Central Bank, but he also served as the Prime Minister of Italy in 2021, providing him with a profound understanding of the EU's political workings. The backing of these two heavyweight figures indicates that this proposal is not a technocratic utopian fantasy, but rather a strategic choice recognized by Europe's financial elite.

The European Commission told the Financial Times that it “is still exploring the potential for EU-level regulation of certain critical infrastructures (such as central counterparties, central securities depositories, and trading venues) as well as large cross-border entities (such as asset management companies).” This cautious wording indicates that specific plans are still under discussion, and the final version may differ from current expectations. Possible options include a complete reorganization of ESMA, the creation of a brand new regulatory body, or a hybrid model where a central authority regulates cross-border entities while domestic entities remain regulated by individual countries.

Small countries oppose and conflicts of interest highlight challenges

According to reports, Luxembourg and Dublin have expressed “hesitation” about the prospect of establishing a single regulatory body and are skeptical about whether the EU will act in the best interests of small countries with financial centers. This opposition is not coincidental but reflects profound internal divisions of interest within the EU. Both Luxembourg and Ireland are small member states, but they have developed highly competitive financial services industries.

Luxembourg is the world's second largest investment fund center, second only to the United States, managing over 5 trillion euros in assets. Dublin has become the EU headquarters for many American financial institutions following Brexit. The success of these countries is largely built on flexible national regulation and competitive tax policies. The establishment of a single regulatory authority may undermine their regulatory autonomy, reducing their ability to attract international financial institutions.

Core Concerns of Small Countries Against

Loss of Regulatory Sovereignty: Unable to attract international companies through flexible national regulatory policies.

Tax Competition Advantage Weakens: Centralized regulation may come with tax coordination, affecting low tax rate strategies.

Unequal Distribution of Decision-Making Power: Concerns that major powers have greater influence in central regulatory bodies.

Decline of Financial Center Status: Unified regulation may lead to the concentration of financial activities in Frankfurt or Paris.

Conflicts of interest like this are not uncommon in EU decision-making. The functioning of the EU requires a balance between “deeper integration” and “respect for national sovereignty,” and financial regulation touches the core of national economic sovereignty. Historically, proposals such as the EU banking union and fiscal integration have been postponed or compromised due to similar divergences. For the proposal of a single regulatory authority to be approved, a solution must be found that can achieve regulatory unity while protecting the legitimate interests of smaller countries.

The Broader Context of Encryption Regulation

In recent months, the European Commission and EU finance ministers have taken several measures aimed at strengthening regulation in key areas of Crypto Assets, covering stablecoins and exchanges among others. These initiatives are not isolated events but are components of the EU's establishment of a comprehensive digital financial regulatory framework. According to previous reports by The Block, Lagarde and EU finance ministers recently reached an agreement on a roadmap for the issuance of a Central Bank Digital Currency (CBDC) for the Eurozone, and the European Commission also plans to propose measures related to the tokenization of real-world assets in December.

These measures together form the three main pillars of the EU's digital finance strategy. The first pillar is MiCA, which establishes a unified regulatory standard for Crypto Assets. The second pillar is the digital euro (CBDC), aimed at providing a sovereign digital currency. The third pillar is the regulatory framework for the tokenization of real-world assets (RWA), allowing traditional assets to circulate on the blockchain. The establishment of a single regulatory authority will provide a unified enforcement mechanism for these three pillars, ensuring that regulatory standards are consistently implemented across the entire EU.

For the Crypto Assets industry, this regulatory environment presents both opportunities and challenges. The opportunity lies in that a clear regulatory framework and a single licensing system will reduce compliance costs, allowing legitimate crypto businesses to operate freely across the EU. The challenge is that stricter regulations may limit certain innovative business models, particularly those related to DeFi (decentralized finance) projects. The EU needs to find a balance between protecting consumers and encouraging innovation.

Legislative Timeline and Implementation Challenges

If the European Commission presents the proposal in December, it will initiate the normal legislative procedure with the European Parliament and Council, including amendments and trilateral negotiations, a process that could last until 2026. This timeline indicates that even if the proposal progresses smoothly, actual implementation will take several years. The EU's legislative process is known for being complex and time-consuming, requiring consensus among the Commission, Parliament, and Council.

Variables that may arise during the legislative process include: the parliament may propose a large number of amendments, particularly regarding the scope of powers of regulatory agencies and accountability mechanisms; member states in the council may request to retain more national regulatory authority; the Crypto Assets industry may engage in lobbying to influence the design of specific provisions. In addition, 2026 is the year of the European Parliament elections, and changes in the political landscape may affect legislative priorities.

Even if the legislation is passed, the implementation phase is equally full of challenges. It requires the establishment of new regulatory bodies or a significant expansion of ESMA's personnel and budget, a smooth transition of existing national regulatory functions to central agencies, and ensuring that the new regulatory bodies have sufficient technical capabilities to oversee complex Crypto Assets businesses. All of this requires time, resources, and political will.