ESMA warns no retail crypto protection in EU until 2024 at the earliest

The European Securities and Markets Authority (ESMA), the bloc’s securities watchdog, warned that investors will not be protected under the European Union’s crypto asset market rules until the end of 2024 at the earliest.

According to a statement issued by the ESMA on Tuesday, as reported by Reuters, investors were advised to brace themselves for the possibility of incurring total losses.

The EU emerged as the first global jurisdiction to endorse a comprehensive set of rules designed to regulate markets for crypto assets such as Bitcoin, with the legislation coming into force in June. However, fully implementing these rules, known as the Markets in Crypto-assets (MiCA), is not expected until Dec. 2024.

Reuters stated that the need for stringent crypto regulation has been underscored by recent events, including the collapse of FTX and drastic volatility in Bitcoin prices. However, it is worth noting that Bitcoin has retained one of the tightest ranges on record throughout 2023.

Currently, crypto assets remain unregulated under EU securities rules, and until the MiCA rules are fully implemented, investors will not benefit from any EU-level regulatory oversight or recourse mechanisms.

The ESMA’s statement cautioned that even with the enforcement of MiCA, no crypto asset would be considered entirely ‘safe’ for retail investors, Reuters reported. Crypto assets, the ESMA stressed, are susceptible to novel operational and security risks, asking investors if they can bear the brunt of losing all the money they intend to invest.

It was also clarified that full protections may remain elusive in EU states offering an 18-month transitional period allowing crypto firms to operate without an EU license. Consequently, customers may remain uncovered until at least July 2026. ESMA noted that a significant proportion of crypto enterprises are likely to continue operating under the transitional terms until mid-2026.

Crypto firms outside the EU will be permitted to offer services to customers within the bloc. Still, only in specific cases where the services have been specifically requested, and even then, the provision will be on a “strictly limited” basis. This exemption, the ESMA warned, should not be exploited to bypass the MiCA regulations.

The watchdog plans to collaborate with national regulators to expedite the application of MiCA rules, emphasizing that the EU should not be seen as a haven for “forum-shopping or illicit practices.”

Earlier this month, ESMA initiated another step towards enforcing MiCA by launching its second consultation package. As per the ESMA announcement on Oct. 5, the regulator is seeking feedback from stakeholders on five key areas: sustainability indicators for distributed ledgers, insider information disclosures, white paper technical requirements, trade transparency measures, and record keeping and business continuity requirements for crypto-asset service providers.

Stakeholders have been encouraged to provide feedback by Dec. 14. With plans to submit the draft technical standards to the European Commission by June 30, 2024, ESMA is proactively working towards fully implementing MiCA. More details about the transitional period and the timeline for MiCA measures are expected in the third consultation package, slated for release in the first quarter of 2024.