The European Securities and Markets Authority (ESMA), the securities watchdog of the European Union (EU), recently issued a warning that investors will have to wait until at least the end of 2024 to receive protection under the EU’s crypto asset market rules. In a statement released on Tuesday, the ESMA advised investors to prepare themselves for the possibility of incurring total losses. This delay in investor protection comes even after the EU became the first global jurisdiction to endorse comprehensive rules for regulating crypto assets, known as the Markets in Crypto-assets (MiCA), which came into effect in June. However, the full implementation of these rules is not expected until December 2024.
Recent events such as the collapse of FTX and the significant volatility in Bitcoin prices have underscored the need for stringent regulation of crypto assets. Although Bitcoin has exhibited one of the tightest price ranges on record throughout 2023, the ESMA stressed that crypto assets remain unregulated under EU securities rules. Until the MiCA rules are fully implemented, investors will not benefit from any EU-level regulatory oversight or recourse mechanisms. Even with the enforcement of MiCA, the ESMA cautioned that no crypto asset can be considered entirely “safe” for retail investors. The inherent operational and security risks associated with crypto assets make them susceptible to potential losses, and investors need to carefully evaluate whether they can bear the brunt of losing all the money they intend to invest.
It is important to note that even EU states offering an 18-month transitional period allowing crypto firms to operate without an EU license may not provide full protections for customers. As a result, customers may remain uncovered until at least July 2026. The ESMA highlighted that a significant proportion of crypto enterprises are likely to continue operating under the transitional terms until mid-2026. While crypto firms outside the EU can offer services to customers within the bloc in specific cases, this provision will be strictly limited and should not be exploited to bypass the MiCA regulations.
ESMA is actively working towards fully implementing MiCA and ensuring the proper regulation of crypto assets in the EU. Earlier this month, the watchdog launched its second consultation package, seeking feedback from stakeholders on key areas such as 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 their feedback by December 14. By June 30, 2024, ESMA plans to submit the draft technical standards to the European Commission, further advancing the implementation of MiCA. More details about the transitional period and the timeline for MiCA measures will be revealed in the third consultation package, expected to be released in the first quarter of 2024.
While the EU has taken the lead in endorsing comprehensive regulations for the crypto asset market, investors should be aware that full protections are not expected until the end of 2024 at the earliest. The ESMA’s warning highlights the importance of understanding and evaluating the risks associated with investing in crypto assets. As the regulatory landscape evolves, stakeholders have the opportunity to provide feedback and shape the future of crypto asset market regulation in the EU.