By rushing towards a centralised supervision of crypto asset providers (CASPs), the European Union risks diluting the very principles that have kept its ambitious project legitimate, vibrant, and diverse.
The move to shift oversight of significant CASPs from national authorities to a single EU agency such as ESMA has been framed as a technical, almost inevitable, evolution. Yet beneath the surface lies a constitutional choice of the highest order, one that deserves honest scrutiny, not quiet acquiescence. The European Commission's 2025 "Targeted Consultation on Integration of EU Capital Markets" reveals this framing starkly, proposing to "transfer certain supervisory tasks for capital markets to the EU level" under the banner of efficiency and simplification, while bypassing a real debate on subsidiarity and proportionality.
At the heart of the European Union’s design are the principles of subsidiarity and proportionality, enshrined in Articles 5(1) and 5(3) of the Treaty on European Union (TEU). These principles are not procedural footnotes; they are constitutional guardrails, ensuring that Union action occurs only where necessary and that it remains proportionate to the goals pursued. For centralisation to be justified, two stringent tests must be met.
First, that Member States are demonstrably incapable of achieving the supervisory objectives individually. Second, that Union-level intervention would provide clear, manifest additional value. On both counts, the case for centralisation remains an unproven gap the Consultation does not and cannot bridge.
Since 2018, Malta has built a robust framework for crypto supervision under its Virtual Financial Assets Act. It has authorised CASPs through rigorous scrutiny, cultivated a professional ecosystem, and fully complied with MiCAR’s transitional obligations ahead of schedule. This is not a jurisdiction awaiting rescue. It is a model of proactive regulation, demonstrating that national authorities are fully capable of supervising dynamic, innovative markets without the need for supranational takeover.
Moreover, the analogies drawn between crypto supervision and the Single Supervisory Mechanism (SSM) for banking, hinted at in the Consultation's approach to cross-border integration, are deeply flawed. Banks are custodians of systemic liquidity. Their failure imperils economies. CASPs operate within much narrower financial perimeters and have shown no comparable contagion risk.
To import banking models into a sector that demands regulatory agility is not just disproportionate, it is conceptually inappropriate.
Administrative efficiency, while important, cannot alone justify the abandonment of subsidiarity and proportionality. Constitutional principles are not inconveniences to be streamlined away; they are the very foundation upon which Europe’s legitimacy stands.
The centralisation drive also misunderstands the very architecture of MiCAR itself. MiCAR was designed to create a Single Rulebook: uniform standards applied across all Member States, enforced through national supervision, not displaced by it. The success of this model in other sectors such as investment funds and insurance proves that convergence does not demand centralisation. It demands coordination, trust, and respect for constitutional discipline, approaches that the Consultation itself acknowledges elsewhere by promoting supervisory convergence rather than immediate centralisation.
At a deeper level, this debate is not about efficiency alone. It is about sovereignty, not in the narrow nationalist sense, but as a living expression of political legitimacy, proximity, and trust.
Local regulators know their markets. They understand their consumers. They cultivate direct relationships with industry, allowing faster feedback loops, more responsive oversight, and smarter regulation. These are not intangible advantages; they are the fabric of resilient governance.
Proposed governance models risk creating supervisory structures increasingly detached from national realities. Diluting the role of Member State authorities would sever vital feedback loops between supervisors, markets, and communities, precisely when Europe's constitutional fabric demands greater, not lesser, proximity.
To replace them with distant, bureaucratic oversight would risk alienating precisely the innovation ecosystems Europe seeks to nurture. It would concentrate decision-making far from the communities it affects, risks which the Consultation admits could arise if simplification and proportionality are not properly addressed.
Moreover, it would diminish the organic expertise that Member States like Malta have painstakingly developed, expertise that cannot be easily centralised without enormous cost, dilution, and delay.
There is a smarter, more faithful path forward. Rather than consolidate power in a single agency, Europe should strengthen joint supervisory colleges for cross-border CASPs. Enhance coordination mechanisms through ESMA and EBA. Use peer reviews, benchmarking, and standard-setting to drive convergence without crushing diversity, approaches that the Consultation lists as possible alternatives.
Such tools have already proven successful elsewhere. They embody the true spirit of subsidiarity: European, when necessary, national where effective.
At a time when trust in European institutions faces pressures from multiple directions, the Union cannot afford to be cavalier with its constitutional soul. The principles that have guided Europe thus far, subsidiarity, proportionality, respect for diversity, are not relics of the past. They are the blueprint for its future.
Article by Dr Ian Gauci
This article was first published on timesofmalta.com on the 4th May 2025.
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