EU plans to expand regulatory powers over crypto exchanges | Lagarde warns of rising risks of “shadow banking”

🕘 Release Date: October 14, 2025

📍 Source: BrokerHiveX European Regulation

🏛 Category: Financial Regulation | Cryptocurrency | Non-Banking System

I. Event Overview: The EU Strengthens its “Unified Regulatory Framework”

In October 2025, the European Securities and Markets Authority (ESMA) announced in Brussels that
A new draft legislation is being launched to expand the regulatory coverage of cryptocurrency exchanges, clearing institutions and custody platforms .
To establish a more "cross-border coordinated" capital market regulatory framework.

According to the Financial Times ( ft.com ),
This plan means that the EU is moving towards the real "European Financial Regulatory Integration 2.0".
This is especially true for crypto assets, over-the-counter derivatives, and high-frequency algorithmic trading platforms.

Verena Ross, Chairperson of ESMA, said:

“The EU market should not create regulatory blind spots due to national borders. Regardless of which member state a platform is registered in, it should be subject to uniform standards.”

2. Regulatory Focus: Crypto Platforms and High-Risk Trading Behaviors

ESMA’s regulatory proposals will focus on three main areas:

ESMA also recommends that the EU establish a "central registration database"
Record information of all registered encryption service providers and disclose compliance status regularly.

This will become the European version of the “post-MiCA regulatory system” , ensuring supervisory continuity and data sharing.

3. ECB Perspective: Lagarde warns of a “non-banking system posing a hidden danger”

European Central Bank (ECB) President Christine Lagarde emphasized in a speech last week that
Non-bank financial institutions (NBFIs) have become one of the biggest potential risks to the European financial system.
She warned that leverage levels in private lending, shadow banking and hedge funds are rising.

Lagarde noted:

“In the crypto and non-bank sectors, we are seeing financial risks migrate outside regulatory boundaries.”

According to data released by the European Central Bank:

• The total assets of Europe's shadow banking system have reached 16.8 trillion euros .
  It accounts for approximately 42% of the entire financial system;

• Over the past 12 months, private credit and alternative investment assets have grown 18%;

• Some high-yield bond funds have leverage ratios exceeding 6 times.

She called on the EU and ESMA to establish a unified "cross-institutional risk supervision mechanism"
Covering non-bank credit, stablecoin financing and decentralized lending platforms.

IV. Policy Path: MiCA 2.0 and Cross-border Regulatory Coordination

The EU's MiCA (Markets in Crypto-Assets Regulation) regulations officially came into effect in 2025.
However, the licensing system currently only applies to a single Member State.
ESMA’s new proposals aim to establish a higher level of “cross-border supervisory coordination”:

The goal is to form a "unified digital asset market regulatory system" by 2026.
Similar to MiFID’s position in the traditional securities sector.

V. Market Impact and Institutional Response

• Exchanges and Custody Platforms
  Several European exchanges welcomed the new regulations, believing that unified supervision can reduce the costs of multiple reviews.
  However, some crypto startups are concerned about rising compliance costs.

• Financial institutions
  Banks generally support expanding regulatory powers to reduce "regulatory arbitrage."
  Societe Generale said:

  “Unified supervision can enhance the confidence of institutions in participating in the crypto market.”

• The Investor Protection Organization
  The Investor Union (BEUC) called on ESMA to set up a crypto consumer protection hotline.
  And it is mandatory to disclose the liquidity and asset custody status of the exchange.

VI. Risks and Challenges

1️⃣Difficulty of coordination among member states :
Some countries (such as Malta and Lithuania) are concerned about the declining competitiveness of their local crypto industries.

2️⃣ Insufficient technical supervision capabilities :
European regulators still lack on-chain monitoring and risk identification tools.

3️⃣ Privacy and compliance conflicts :
Some provisions of GDPR and MiCA are inconsistent in on-chain tracking.

4️⃣International competition pressure :
If regulations are too strict, capital may flow to more open regions such as Singapore and the UAE.

7. Future Outlook: The Tipping Point of European Regulatory Harmonization

ESMA’s proposal and Lagarde’s speech signal that the EU is entering a new phase of comprehensive regulatory convergence .
In the future, Europe will form a "three-tier regulatory structure":

• The ECB is responsible for macro-financial stability;

• ESMA is responsible for cross-border market surveillance;

• National regulators enforce local compliance and penalties.

"Financial innovation requires speed, and regulation requires balance. Our goal is for the two to coexist."
— Verena Ross (Chairperson of ESMA)

🔗 References

• FT – EU watchdog prepares to expand oversight of crypto and exchanges (2025)

• Reuters – Europe needs tighter regulation of shadow banks, Lagarde says (2025)