EU's Unified Oversight Push Risks Driving Crypto Innovation Abroad

The European Union is poised to significantly tighten its regulatory grip on financial markets, with new measures targeting both traditional stock exchanges and the rapidly evolving cryptocurrency sector. At the heart of this expansion is a bid to address regulatory overlaps and reduce fragmentation across member states, though the approach has sparked debate over its potential to stifle innovation and competitiveness.

A key challenge emerges from the intersection of two existing frameworks: the Markets in Crypto-Assets (MiCA) regulation and the Payment Services Directive (PSD2). Beginning in March 2026, stablecoin firms will face a dual licensing burden, requiring both a MiCA crypto license and a separate payment services license for the same activities, such as custody and transfer of euro-backed stablecoins, according to a BeinCrypto article. This duplication, industry leaders warn, could create a compliance crisis. For example, companies will need to meet combined capital requirements of €250,000-€125,000 under MiCA and an additional €125,000 under PSD2—alongside increased operational costs from navigating two regulatory regimes. Patrick Hansen, Circle's EU policy lead, has called the situation a "regulatory own goal," arguing it undermines MiCA's original goal of unified oversight.

To address these concerns, the European Banking Authority (EBA) issued a No Action Letter in June 2025, granting a transition period until March 2026 for firms to adapt. However, critics argue the delay is insufficient to resolve systemic issues, and the EBA itself has acknowledged the redundancy of overlapping regulations.

Meanwhile, the European Commission is advancing a broader plan to centralize oversight of financial market infrastructures, including stock and crypto exchanges, under the European Securities and Markets Authority (ESMA). This initiative, expected to be formally proposed in December, aims to reduce regulatory fragmentation and streamline supervision of cross-border entities, according to a Phemex report. While Germany and France have expressed support, countries like Luxembourg and Ireland have raised concerns that centralization could weaken their domestic financial sectors' competitiveness.

The MiCA framework itself is already in motion, with ESMA preparing an interim register of crypto-asset white papers and service providers by December 2024, according to ESMA's MiCA page. This register, which will include details on authorized and non-compliant entities, is part of a broader effort to create transparency in the sector. However, the interim nature of the system—reliant on weekly updates from national authorities—has raised questions about its immediacy and effectiveness.

The EU's regulatory push highlights a broader tension: balancing innovation with investor protection. While proponents argue centralization and stricter oversight will foster trust and stability, critics fear the added complexity could deter investment and drive businesses to more accommodating jurisdictions. As the December 2026 deadline looms, the outcome of these debates will shape the future of Europe's financial landscape.