The European Securities and Markets Authority (ESMA) on Thursday highlighted a Maltese regulator's shortcomings over the issuance of a licence enabling cryptocurrency firms to operate across the EU.
In recent years the tiny Mediterranean island has managed to attract a number of cryptocurrency investors and companies, leading to accusations of lax oversight in an industry already considered to be poorly regulated.
The ESMA's criticism, contained in a final report, followed December's launch of the first European Union-wide cryptocurrency regulation.
Markets in Crypto-Asset (MiCA) insists on service providers obtaining a licence to operate legally in the European Union.
The EU watchdog said on Thursday that Malta's "authorisation process should have been more thorough and conducted on a sufficient time to allow (Maltese regulator) MFSA to properly assess compliance against the MiCA framework".
ESMA added that it "did not find evidence that certain key aspects of the authorisation file were adequately assessed including... the on-boarding of new clients".
MiCA is issued once specific criteria on anti-money laundering, prevention of terror group financing, IT security and financial soundness have been implemented.
Such a framework aims to protect investors and provide credibility to the sector.
MFSA defended its handling in a response sent to AFP on Thursday.
"It is very important to dispel the myth that Malta has been rushing when it comes to granting licenses," it said in a statement.
"To be clear, no one has been granted a license in a matter of days. Preparations for MiCA implementation have been comprehensive and commenced two years ago."
It added that action had been taken "to ensure Malta retains its position as a robust yet accessible jurisdiction.
"The final report recognises a lot of strengths when it comes to the regulation of digital assets in Malta and we are extremely proud of the work that has been achieved on this front to date," the statement said.
Thursday's report did not name Seychelles-based crypto exchange OKX, to which MFSA issued a licence in late January.
This was one month before the company paid half a billion dollars to the US Department of Justice over separate compliance failures.
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