The critical moment for MiCA: Can the EU withstand the "encryption passport" crisis?

Author: BlockWeeks

The EU's Market in Crypto-Assets Regulation ( MiCA ) has been hailed as a milestone achievement - the world's first comprehensive framework aimed at unifying the fragmented digital asset landscape. Its core commitment is the "crypto passporting": a revolutionary concept that allows businesses to operate seamlessly across the entire EU as long as they obtain a license in any one of the 27 member states. However, less than a year into the regulation's implementation, this vision of a single market is facing severe stress testing, revealing deep-rooted tensions between national interests and collective ambitions.

France, as a key heavyweight member of the European Union, is threatening to use its regulatory agency's so-called "nuclear weapon": to block cryptocurrency companies that have obtained licenses in the more loosely regulated EU jurisdictions from entering its market. This move stems from concerns about a regulatory "race to the bottom," which challenges the fundamental cornerstone of MiCA and raises a critical question: Is the EU's grand cryptocurrency experiment on the brink of failure?

####Commitments and Risks of a Single Access Pass

The passporting principle is the engine of the EU's single market for financial services. For the crypto industry, MiCA was supposed to be a game changer. Exchanges like Coinbase (licensed in Luxembourg) and Kraken (licensed in Ireland) have strategically positioned themselves, hoping to leverage a single license for pan-European expansion, thus significantly reducing compliance costs and legal complexities.

However, this system is built on the basis of mutual trust—assuming that a license issued in Malta carries the same weight and scrutiny as one issued in Germany or France. Now, this trust is clearly breaking down. French regulators, particularly the Autorité des Marchés Financiers (AMF), have publicly expressed concerns about "regulatory arbitrage" (regulatory shopping), where businesses tend to choose jurisdictions that issue licenses more quickly and have looser requirements. The risk this poses is that: the weakest regulatory standards may become the de facto benchmark for the entire union, undermining the primary objectives of legislation that are meant to ensure investor protection and market integrity.

####A Tale of Two Europes: The Regulator's Dilemma

BlockWeeks believes that the current conflict highlights fundamental divergences within the EU regarding regulatory philosophy and economic strategy.

On one side are regulatory hawks like France, with Italy and Austria also aligning with them. Their position is rooted in the desire to maintain high standards for consumer protection and anti-money laundering (AML). After establishing a strict domestic framework, they are unwilling to see these standards diluted by companies coming from more loosely regulated areas. The AMF's stern warning is a clear signal: if a threat is perceived, it will prioritize the stability of the national market over the operation of the passport system.

On the other hand, there are countries that actively embrace the cryptocurrency industry. Malta, which prides itself on being the "Blockchain Island", Lithuania, known for its fast licensing system, and Liechtenstein, which has become a pioneer with its "Blockchain Act", all view digital finance as a significant economic opportunity. For them, a more flexible and business-friendly regulatory environment is a competitive advantage. Malta's financial regulators have publicly opposed calls for centralization of power, arguing that it would increase unnecessary bureaucratic procedures and stifle innovation—which are precisely the qualities that attract crypto companies to their country.

This conflict is not only procedural; it is also a political struggle about the future of financial regulation in the digital age.

####Economic Impact: The High Cost of a Divided Alliance

If France puts its threats into action, the consequences will be immediate and severe. The core advantage of MiCA – "one license for 27 countries" – will be lost, replaced by an unpredictable market pieced together by bilateral approvals.

For virtual asset service providers (VASP), this directly translates to:

• Soaring Compliance Costs: Navigating through 27 different rules and approval processes will be prohibitively expensive for innovation-driven startups and small businesses.
• Uncertainty in Law and Operations: The lack of a unified market can create paralyzing unknown risks, dampening investment willingness and making long-term strategic planning nearly impossible.
• Erosion of Competitiveness: The EU's ambition to become a global cryptocurrency hub will suffer a severe blow. Existing data shows that the implementation of MiCA has been tortuous, accompanied by high costs and difficulties in bank access, leading to a shrinkage of the European crypto startup scene; a fragmented market will only accelerate this trend, attracting funds and talent to more predictable jurisdictions.

####Proposed Solution: A more powerful but politically controversial ESMA

The solution advocated by France, Italy, and Austria is to empower the European Securities and Markets Authority (ESMA) with greater authority, making it a centralized, pan-European regulator for large cryptocurrency enterprises. Currently, the role of ESMA under MiCA is mainly to set technical standards to promote "regulatory convergence" among national regulators. It lacks the direct enforcement and auditing powers necessary to prevent regulatory arbitrage.

In theory, a centralized regulatory body could ensure the uniform application of MiCA rules, eliminate the "weakest link" problem, and restore trust in the passporting system. However, this is a politically controversial proposal. Granting more power to a supranational body like ESMA involves a cession of sovereignty, which many member states, particularly smaller countries that value their regulatory autonomy, are unwilling to accept. The debate surrounding ESMA's role is a microcosm of the ongoing struggle within the EU between federalist ambitions and the supremacy of nation-states.

####Global Perspective: The Attractiveness of Predictability in the UAE

As Europe struggles to address its internal divisions, other regions are presenting a clear, alternative value proposition: stability. The United Arab Emirates has become a special example. Through a multi-layered framework involving the Dubai Virtual Assets Regulatory Authority (VARA), the Abu Dhabi Global Market (ADGM), and the federal Securities and Commodities Authority (SCA), the UAE has established a predictable and comprehensive regulatory environment.

Unlike the unpredictable political winds in Europe, the UAE offers businesses a clear set of rules, dedicated regulatory bodies, and a tangible long-term commitment to the digital asset space. This certainty is highly attractive for companies seeking a stable haven for development.

####Conclusion: MiCA is at a crossroads

The original intention of MiCA was to become a powerful tool for unifying the European crypto market, but the current risk is that it has instead become a bullet that exposes the oldest cracks in the EU. France's threat to veto the crypto passport is not just a regulatory dispute; when powerful national interests are at stake, it poses a fundamental challenge to the EU's ability to act as a cohesive economic group.

The road ahead requires difficult compromises.

BlockWeeks believes that without a reliable mechanism to ensure that all 27 member states can implement consistent and high-quality regulation—whether through a stronger ESMA or another binding agreement—the promises of MiCA will remain unfulfilled. The crypto world is watching closely. Whether the EU can resolve this internal conflict will not only determine its role as a regulator but also decide whether it remains a competitive and significant player in the future of global finance.