Malta's financial regulator failed to conduct adequate risk assessments when granting cryptocurrency licenses under the European Union's new regulatory framework, according to a critical review released Thursday by the bloc's securities watchdog. The European Securities and Markets Authority found that Malta's authorization process was not thorough enough and material issues with at least one crypto company remained unresolved when its license was approved.
What to Know:
- ESMA's peer review found Malta's crypto licensing process only "partially" met regulatory expectations under the new MiCA framework
- Malta has granted five crypto asset service provider licenses since January under the EU's comprehensive crypto regulations
- The review criticized Malta for insufficient risk assessment and failing to properly evaluate a company's supervisory history
Speed Over Scrutiny Raises Concerns
The review comes after Reuters first reported in June that ESMA was scrutinizing Malta's crypto authorization process. Some regulators had raised concerns in closed-door meetings about the speed with which licenses were being granted by certain member states. The examination focused on Malta's decision to grant a license to one particular crypto company, though ESMA did not specify which firm.
ESMA launched its review in April "following a series of events" but provided no additional details about what prompted the investigation. The findings highlight broader concerns about inconsistent approaches across EU member states and whether individual regulators can effectively supervise complex cross-border financial firms.
Under the EU's Markets in Crypto-Assets regulation, which took effect this year as the world's first comprehensive set of crypto rules, companies offering crypto services must obtain a license from a national regulator.
That license can then be "passported" to allow companies to operate in other EU member states.
Malta Defends Its Approach
Malta's Financial Services Authority said Thursday it was proud of its role as an "early adopter" of digital asset regulation. The MFSA did not directly address ESMA's criticisms in its statement. Malta has granted five crypto asset service provider licenses under MiCA since January.
ESMA's review found that while the MFSA had sufficient expertise in cryptocurrency and adequate resources to authorize and supervise crypto companies under MiCA, its authorization process only "partially" met expectations. The review stated that "the overall authorization process should have been more thorough and conducted on a sufficient time to allow MFSA to properly assess compliance against the MiCA framework."
The European regulator found that material issues with the crypto company were unresolved or pending remediation when the license was granted. ESMA also determined that the company's supervisory history was not "adequately considered" during the approval process.
Recommendations for Improvement
The review recommended that Maltese regulators pay particular attention to several key areas when evaluating crypto companies. These include business plans, conflicts of interest, governance arrangements, and IT systems. ESMA also emphasized the need for closer scrutiny of companies' promotion of unregulated services.
The criticism underscores the challenges facing EU regulators as they implement the bloc's landmark cryptocurrency legislation. The MiCA regulation represents the world's first comprehensive attempt to regulate digital assets, but its success depends on consistent enforcement across all 27 member states.
Closing Thoughts
ESMA's peer review of Malta reveals the growing pains associated with implementing the EU's groundbreaking cryptocurrency regulations. The findings highlight the delicate balance regulators must strike between fostering innovation and ensuring adequate consumer protection in the rapidly evolving digital asset sector.