On August 18, 2025, the European Securities and Markets Authority (ESMA) published a consultation outlining draft rules that would significantly restrict the ability of non-EU crypto asset service providers to offer services directly to customers within the European Union. ESMA’s proposal addresses concerns about regulatory arbitrage, investor protection and financial stability risks associated with cross-border crypto operations.
Under the draft regime, crypto firms established outside the EU would be required to set up a local branch or subsidiary within an EU member state and obtain a full license under the Markets in Crypto-Assets regulation (MiCA) before providing any services such as custody, trading, staking or issuance of tokens. The requirement is designed to ensure that critical operational functions—including governance, compliance and risk management—are overseen by local regulators and subject to EU legal frameworks.
ESMA emphasized that foreign providers often benefit from lower regulatory costs and weaker supervision in their home jurisdictions, creating unfair competition for EU-based firms and exposing EU investors to services that may not adhere to equivalent standards. The draft rules would also mandate that custodial wallets are hosted on servers within the EU and that transaction records are accessible to EU regulators at all times.
Market participants have raised concerns about the potential impact on liquidity and innovation if international firms withdraw services or restructure to comply. Industry associations have called for phased implementation and carve-outs for low-risk activities. ESMA has opened a public consultation lasting three months, after which it will finalize the proposal and submit it to the European Commission and EU member states for formal approval. If adopted, the new rules could take effect in mid-2026, marking a significant step toward harmonizing crypto oversight across the bloc.
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