Counterarguments to Centralising CASP Supervision in the EU

Introduction
The regulation of Crypto Asset Service Providers (CASPs) in the EU has generated significant debate, particularly concerning the potential centralisation of oversight under the European Securities and Markets Authority. While the Banque de France and the French Autorité des Marchés Financiers argue for standardised EU-level supervision, compelling counterarguments favour a decentralised approach.

This article contends against the EU-wide supervision of CASPs at this time and examines counterarguments emphasising the principles of subsidiarity and proportionality, customised supervision, resource efficiency, and the necessity for supervisory convergence without centralisation. The article is structured as follows: Section A outlines the arguments in favour of centralised supervision, while Section B explores five counterarguments against such centralisation.

Section A – Centralisation of Supervision

Presently, national competent authorities are, in terms of the Markets in Crypto Assets Regulation (MiCA) tasked with overseeing CASPs. Although this framework aims to enhance consistency, it is alleged to have limited uniform supervisory practices that complicate the regulatory environment, with collaboration between home and host authorities often proving to be suboptimal. This has prompted  calls for centralised supervision, as such centralisation can be more readily achieved in emerging regulatory domains.

The operational nature of CASPs, which predominantly functions online and transcends national boundaries, complicates national supervisory engagement, and although cross-border activities are not inherently risky, their increasing prevalence highlights the need for a more consistent supervisory framework. Proponents of this viewpoint contend that the implementation of the MiCA has amplified the urgency of addressing these supervisory challenges, thereby necessitating that oversight for pan-European participants be entrusted to a supranational authority. They further assert that national supervision is less effective in mitigating significant risks associated with crypto-assets, which may leave investors vulnerable to adverse effects such as hacks; thus, centralised supervision is considered essential for addressing risks related to potential CASP failures that could impact investors across Member States.

This perspective is supported by the European Commission, which, in its Savings and Investment Union Communication, asserts that the extensive reach of significant CASPs renders them potential sources of risks to consumer protection, market integrity, and financial stability, best mitigated through EU-level oversight.

Section B – Counterarguments

Several counterarguments challenge the claim that CASP supervision should be centralised at the EU level, which are concisely examined in this section and organised under the following headings:

1. Absence of Widespread Issues

The current risks associated with CASPs do not align with the systemic threats posed by the largest banking groups in the European Union at the time the Single Supervisory Mechanism was instituted, which empowered the European Central Bank with supervisory authority. Presently, there is no urgent financial stability concern arising from CASPs that necessitates a centralised supervisory framework. Furthermore, the unique characteristics of CASPs indicate that their regulation should not replicate that of more systemic financial institutions.

2. Principle of Subsidiarity and Proportionality

Central to the argument against centralised oversight of CASPs is the principle of subsidiarity, which asserts that decisions should be made at the national level unless it can be demonstrated that a supranational body would be more effective. This principle governs the exercise of the EU’s competences, ensuring that Member States maintain the authority to act in areas lacking exclusive EU jurisdiction. Given that the authorisation and supervision of crypto assets under MiCA has recently commenced and that no significant failures of CASPs have prompted a shift towards supranational governance, national oversight remains both appropriate and sufficient.

Additionally, the principle of proportionality emphasises that EU actions should not exceed what is necessary to achieve Union objectives. Local regulatory authorities are often better equipped to monitor CASPs effectively, and transferring oversight to EU agencies may impose disproportionate burdens that could undermine innovation and competition within the sector. Thus, a proportionate regulatory approach not only preserves local expertise but also enhances the EU's competitiveness, fostering an environment conducive to the growth of the crypto-asset market and reinforcing the EU's position as a leader in technology and digital finance.

3. Customised Supervision

The investor protection risks associated with CASPs may differ across EU member states. For example, the level of consumer awareness and education concerning crypto-assets can greatly influence investor protection risks. In Member States where there is significant public education about crypto-asset risks, investors may be better equipped to make informed decisions, reducing their risk exposure. In contrast, in countries with limited public knowledge, investors might be more vulnerable to misinformation or high-risk investments. This diversity necessitates supervision that is responsive to local conditions, coordinated between the home and the host states under passporting conditions, rather than a central framework that may fail to capture specific risks. Such tailored approaches ensure that the regulatory environment is sensitive to the unique cultural landscapes of each member state, allowing for more effective risk management.

4. Resource Considerations and Efficiency

Centralising supervision under EU agencies would require substantial resources, including significant funding and staffing to effectively oversee diverse CASPs. Many Member States already possess functional supervisory frameworks and adequate resources to manage associated risks without imposing additional regulatory layers. Duplicating efforts at the EU level could lead to inefficiencies and a misallocation of resources, undermining the necessary oversight in a rapidly evolving sector. Furthermore, a wealth of specialised knowledge has developed organically across jurisdictions, with countries like  France and Malta, leading in CASP supervision. A centralised regulatory structure would necessitate expertise across multiple domains, potentially incurring high costs for recruiting qualified personnel, which may not yield optimal outcomes.

5. Convergence Without Centralisation

While establishing supervisory convergence and collaboration between supervisors is central to mitigating supervisory arbitrage, these goals can be achieved without resorting to centralised supervision. Current frameworks for: [i] supervisory coordination, like the colleges for multinational banks and asset managers, and [ii] supervisory convergence, such as peer reviews, provide avenues for collaboration and convergence that respect national regulatory autonomy. Similar structures could continue be effectively applied to the supervision of CASPs.

Conclusion
In conclusion, the regulation of CASPs within the EU necessitates careful consideration of the potential centralisation of oversight under an EU Agency. This article argues against such centralisation at this juncture, emphasising the principle of subsidiarity, which supports local decision-making. The lack of widespread systemic risks and the specialised expertise within local regulatory authorities suggest that a decentralised regulatory framework, coupled with supervisory convergence efforts, is more suitable for addressing investor protection concerns and ensuring market stability. Additionally, the principle of proportionality underscores the importance of avoiding burdensome regulations that may impede innovation and competition. Current collaborative mechanisms among regulators enable necessary convergence without the need for centralised supervision, fostering an adaptable and competitive European crypto-market that prioritises investor interests.

Christopher P. Buttigieg is a Professor at the University of Malta and Chief Officer for Supervision at the Malta Financial Services Authority.