ESMA-led Collaboration: An Alternative to Centralised Supervision of Cryptoassets

This article, which serves as a continuation of the author's previous piece, presents an alternative to the centralisation of supervision of cryptoasset service providers (CASPs), currently under consideration in Europe. It proposes a framework based on ‘knowledge sharing in financial supervision,’ and emphasises the strategic use of existing cooperative mechanisms and convergence tools by the European Securities and Markets Authority (ESMA). Although centralised supervision offers benefits such as consistent enforcement and economies of scale, it often fails to address the diverse national contexts, market particularities, and swiftly changing technological environments characteristic of a developing financial system. 

The proposed framework advocates for greater collaboration among national financial supervisors, supported by the ongoing development and application of standardised guidelines/supervisory briefings, training programs to enhance knowledge sharing, systematic peer review processes, and common supervisory actions (CSAs). The core argument of this article is that strengthening collaborative and convergence efforts provides a robust and flexible framework for managing the complexities of cryptoasset market. This approach would encourage continuous learning, fosters innovation, and builds mutual trust among financial supervisors.

1. Knowledge Sharing in Financial Supervision

The proposed framework for knowledge sharing in financial supervision would strengthen the existing exchange of information, expertise, and best practices among supervisory authorities. European supervisors would continue developing a supervisory handbook (also referred to as supervisory briefings) encapsulating identified best practices, facilitating convergent CASP oversight, while respecting national diversity. This residual diversity, coupled with competition of best practices in financial supervision—aiming to achieve a ‘race to the top’ rather than a ‘race to the bottom’—would foster the continuous evolution of supervisory methods. This would steer supervisory evolution towards excellence, encouraging supervisors to establish optimal principles that become de facto precedents across the EU. 

The operationalisation of a framework for knowledge sharing in financial supervision would necessitate the creation of more structured collective training initiatives, notably through the establishment of a European Supervisory Authorities academy for financial supervisors. These training programs would do more than build skills; they would strengthen Europe's supervision of CASPs by developing local expertise, creating a specialised knowledge system, which supports independent decision-making across the EU. While initiatives like the EU Supervisory Digital Finance Academy, spearheaded by the EU Commission, are already in operation, this article proposes that a more permanent structure should be considered, established and led by European supervisors, covering all fields of supervision.

The proposed approach, which emphasises knowledge sharing among supervisory authorities, fosters a collaborative learning environment that can rapidly respond to market innovations and emerging risks. This collective learning environment together with a reinforced process for supervisory convergence would be superior to the proposed centralisation of supervision of CASPs because it leverages diverse expertise and localised insights, rather than relying on a single, potentially less flexible, central authority.

2. Supervisory Convergence 

Continued strategic deployment of existing supervisory convergence tools by ESMA is crucial for fostering collaboration and consistency, ultimately strengthening mutual trust between national financial supervisors. In particular, peer reviews, and common supervisory actions, supplemented by mechanisms like supervisory colleges, would contribute to a more convergent supervisory landscape.

For instance, the ongoing development and review of a European supervisory handbook for CASPs (in the form of supervisory briefings) would require ESMA-led peer review processes. Under a framework of knowledge sharing in financial supervision, peer reviews would not only assess compliance but also function as platforms for mutual learning and the sharing of supervisory experiences. By addressing divergences through targeted exchanges and incorporating emerging best practices, the peer review mechanism could evolve from a compliance tool into a means of capacity building and fostering mutual trust.

Additionally, CSAs should be explicitly oriented toward achieving measurable supervisory outcomes that directly mitigate risks to investor protection and market integrity across the EU. Under the knowledge-sharing philosophy, these outcomes would be clearly articulated and systematically monitored to ensure their realisation.

One may safely argue that the proposed approach would be better than centralisation as it would continue fostering a decentralised yet coordinated system grounded in mutual learning. This approach mitigates the inherent disadvantages of central oversight, such as suppressing jurisdiction-specific expertise, reducing operational flexibility, and impairing responsiveness to rapid market and technological changes. Through targeted tools like peer review and the proposed outcomes-based CSAs, convergence promotes continuous knowledge exchange and incremental institutional learning, which in turn would enhance supervisory effectiveness.

3. Colleges of Supervisors 

Colleges of supervisors could be a pivotal tool in ensuring efficient, effective, and consistent oversight of CASPs. Colleges of supervisors preserve jurisdictional nuances, while enabling effective collaboration, making them especially suitable for supervising multi-jurisdictional entities which are common among CASPs. They allow national authorities to leverage local expertise, ensuring oversight remains sensitive to specific market, legal, and cultural contexts—key for nuanced and agile supervision. By fostering mutual trust, information sharing, and coordinated enforcement, these collegiate bodies enhance responsiveness to emerging risks. Integrating ESMA within these structures, under the supervisory colleges’ framework, would further promote coordination and enables swift, cohesive responses to cross-border systemic threats. ESMA could actively promote and oversee the operational efficacy and uniformity of these colleges. In this capacity, it would assume a leadership role to ensure their consistent and coherent operation. 

Conclusion

In conclusion, the proposed framework for knowledge sharing in financial supervision, aligned with the principle of subsidiarity, emphasises the critical importance of cooperation and collaboration in achieving supervisory convergence while respecting national regulatory autonomy. This proposed framework recognises the unique strengths of national financial supervisors which operate in an adaptive regulatory environment capable of responding to the rapid evolution of crypto markets. Implementing continuous training, a supervisory handbook, peer reviews, and outcome-driven CSAs are central to this system, ensuring continuous improvement.

Furthermore, the proposed framework, relying on a continuously refined European handbook for CASP supervision, ensures efficiency potentially unattainable through a centralised framework, which may result in bureaucratic inefficiencies and a lack of responsiveness to the detriment of the cryptoassets markets. Through structured cooperation and mutual learning, the EU would be fostering supervisory excellence and continue promoting convergence, whilst concurrently safeguarding diversity and an innovation-friendly financial environment that is conducive to long-term growth and confidence.

Centralised supervision, whilst offering potential benefits, such as uniform enforcement and economies of scale, often struggles to account for diverse national contexts and evolving technological landscapes. Conversely, a knowledge-sharing framework leverages the decentralised expertise of national authorities, fostering a more nuanced and responsive approach. Through structured cooperation, comprehensive training, and outcome-oriented actions, the EU can cultivate a culture of ‘competition of best supervisory practices,’ encouraging innovation and elevated standards.

Christopher Buttigieg is an Associate Professor in the Banking, Finance and Investments Department at the University of Malta and Chief Officer Supervision at Malta Financial Services Authority.