BaFin Backs ESMA Centralization to Curb Regulatory Arbitrage

Germany's Federal Financial Supervisory Authority (BaFin) has thrown its weight behind a European Commission proposal to grant the European Securities and Markets Authority (ESMA) direct supervision of crypto and stock markets, arguing that firms with digital business models deliberately establish operations where EU supervision is weakest before expanding across the bloc.

Thorsten Pötzsch, BaFin's chief executive director for securities supervision, said the practice must be stopped. Speaking at a capital markets conference in Frankfurt hosted by the bwf banking association and ICMA, Pötzsch did not name any specific company or sector. However, for brokers and crypto firms, the described practice aligns with passporting, which allows authorization in one member state to provide services across all 27 EU countries.

Pötzsch said financial centers should not "engage in a race to the bottom to attract financial firms," and that firms exploiting gaps between national supervisors should not be able to scale that arbitrage across the single market. "We cannot let that happen," he said.

The European Commission's plan, debated since last November, has already split the industry. George Theocharides, chairman of the Cyprus Securities and Exchange Commission (CySEC), has backed the same centralization push, arguing that a single market must operate on a level playing field.

Data from FM Intelligence shows that German entities hold 22.0% of authorized crypto-asset service providers but only 7.2% of declared host-state links, indicating that the country licenses heavily and passports out lightly.

Pötzsch also addressed stablecoins, specifically multi-issuer arrangements where the same token is issued by both an EU entity and a third-country entity. He said such structures carry risks for issuers, holders, banks and the wider market. "We therefore firmly oppose these models," he said.

That position aligns BaFin with the European Central Bank (ECB) and the European Systemic Risk Board (ESRB), which warned through 2025 that such schemes could allow non-EU holders to redeem against the EU issuer's reserves in a run. The ESRB recommended in September 2025 that the structures be restricted or ruled out. The Markets in Crypto-Assets Regulation (MiCA) does not address joint issuance.

Pötzsch also called for centralization alongside a shorter rulebook. He said the MiCA review "must not become an exercise in deregulation" while warning against unnecessary rules. As an example of excess, he pointed to the second Markets in Financial Instruments Directive (MiFID II), which rests on "263 additional legal acts" at Levels 2 and 3, and questioned whether investor protection requires that much detail.

ESMA reached a similar conclusion in March, when its year-long consultation found that between 1% and 10% of clients open the key information documents firms are required to produce.

BaFin has already reduced its own approval timelines. Share prospectus approvals now take six to eight weeks under a faster procedure, down from about ten to twelve weeks, and authorizations for asset managers moving from registration to full permission previously ran eight to twelve months.