The European Securities and Markets Authority (ESMA) issued a statement on October 17, 2023, emphasising that investors in Europe will not enjoy full protections under the European Union's (EU) crypto asset market rules until at least December 2024.

The EU had earlier set a global precedent by approving comprehensive regulations for crypto assets, referred to as the Markets in Crypto-Assets Regulation (MiCA), effective from June 2023 but with complete application expected by December 2024.

ESMA's warning comes in the wake of increased urgency for crypto regulations following the collapse of the FTX crypto exchange and significant volatility in Bitcoin prices.

Currently, crypto assets remain unregulated under EU securities rules, and the MiCA rules, once implemented, will be the first attempt to bring comprehensive oversight to the crypto market.

Potential for Total Losses and Extended Protections

ESMA cautioned investors that even with the implementation of MiCA, they should be prepared for the possibility of incurring total losses, stating, "Even with the implementation of MiCA, retail investors must be aware that there will be no such thing as a 'safe' crypto asset." The watchdog highlighted the speculative nature of many crypto assets and their susceptibility to "novel operational and security risks."

Furthermore, ESMA revealed that full protections might not be available in EU states that grant an 18-month transitional period for crypto firms to operate without an EU licence. This means customers may not benefit from EU-level regulatory safeguards until at least July 2026. ESMA acknowledged that a significant number of crypto firms might continue to operate under these transitional terms until mid-2026.

International Crypto Firms and Limited Safeguards

ESMA clarified that crypto firms from non-EU countries would be allowed to provide services to EU customers, but only on a "strictly limited" basis and when specifically requested. However, ESMA warned against exploiting this exemption to circumvent MiCA regulations.

The watchdog stressed the importance of collaboration with national regulators to ensure a unified application of MiCA rules and discourage forum-shopping or illicit practices. The timeline for full rights and protections for crypto asset service providers under MiCA might extend until July 2026, leaving investors with limited recourse during the transitional period.

ESMA's Recommendations and Ongoing Consultations

ESMA urged crypto firms to start planning for the adoption of MiCA, emphasising the need for adequate preparations to reduce the risk of disruptive business model adjustments. The regulatory authority is actively working on standards and guidance, along with national policymakers, to implement the new regulatory framework effectively.

However, ESMA cautioned that the added safeguards would not protect investors during the implementation period and highlighted the potential challenges in overseeing global crypto firms with complex and opaque organisational structures.

In a letter to European policymakers, ESMA chair Verena Ross called for consideration of limiting the optional grandfathering period to 12 months, emphasising the need for enhanced cooperation among national regulators during the implementation and transitional phases.

Investors in the EU crypto market are advised to exercise caution and recognize the risks associated with crypto assets, even with the forthcoming MiCA regulations.