The European Securities and Markets Authority has launched a review of the Malta encryption licensing framework.

The European Securities and Markets Authority (ESMA) has reviewed Malta’s Crypto Assets licensing framework and raised questions about how the island nation’s financial regulatory authority authorizes Crypto Assets Service Providers (CASP). This review highlights concerns regarding the Malta Financial Services Authority (MFSA)'s oversight and authorization process under the “Markets in Crypto Assets” (MiCA) regulations.

Review Focus: Rigor of Authorization Standards

According to Bitcoinist, the ESMA’s Peer Review Committee (PRC) conducted a targeted assessment of an unnamed CASP authorized by MFSA, finding that the regulator fell short of expectations in certain areas. While the MFSA performed well in terms of staffing and technical infrastructure, the review pointed out that the regulator “only partially met expectations” during the approval process.

ESMA emphasized that this issue is not limited to Malta, but also requires all EU national competent authorities (NCA) to unify regulatory mechanisms to ensure consistency under the MiCA unified regulatory framework.

Regulatory Coordination under MiCA

According to the ESMA report, this review is aimed at Malta, but its purpose is to promote regulatory convergence across the entire EU, especially against the backdrop of the gradual implementation of MiCA. MiCA (Regulation on Crypto Assets in the Market) will officially take effect in the EU in June 2024, aiming to eliminate regulatory arbitrage and create a fair competitive environment for the crypto market.

The ESMA Peer Review Committee analyzed three key aspects of Malta’s crypto regulation: regulatory structure and staffing, authorization process, and post-licensing supervisory measures. The MFSA was praised for its sufficient expertise and resources in the supervision of CASP.

However, the report also points out that there are certain gaps in the MFSA’s handling of significant issues during the authorization phase, suggesting that it improve its ability to assess unresolved or insufficiently reviewed issues that may arise after licensing.

Strengthen Regulatory Coordination Among EU Member States

The ESMA report emphasizes the importance of regulatory consistency, especially as new crypto assets businesses apply for licenses under the MiCA framework. The PRC specifically warns that national regulatory authorities must quickly adapt to the increasing volume of applications and the increasingly complex risk characteristics of CASPs.

“Due to the innovative nature of these entities and the inherent risks of their business models, the PRC advises all NCAs to particularly focus on certain aspects of the authorization process,” the committee stated.

Regulatory Consistency Driven by MiCA

With the implementation of MiCA, ESMA expects all regulatory authorities in EU member states to unify their authorization processes and ensure the coordination of their supervisory capabilities and enforcement strategies. This new regulatory framework will promote coordination among countries in supervisory and authorization procedures, helping to avoid regulatory arbitrage.

Challenges of Malta’s Crypto-friendly Policies

Despite being historically regarded as a crypto-friendly jurisdiction within the EU, the recent review by ESMA indicates that all EU member states will face new challenges in the face of an evolving regulatory environment and heightened regulatory demands. Regulatory transparency and coordination will become core criteria for assessing the effectiveness of national crypto regulation in the future.