A high number of electric vehicles (EVs) are expected to reach end-of-(first)-life during the mobility transition, leaving large volumes of scarce materials behind. At the same time, shortages are expected in the supply chain for battery materials, emphasising the urgency to develop a circular economy for EV batteries. In this study, we investigated the market formation of repurposing and recycling by simulating long-term market dynamics. We quantitatively assessed the reinforcing and counteracting impact of the newly introduced EU battery regulation (2023/1542). We built a system dynamics model to capture the decision factors for repurposing or recycling end-of-life EV batteries. Our findings reveal that the EU battery regulation is effective when it comes to building the required recycling capacities. Our simulations highlight that the current recycling capacities are insufficient to meet the growing demand, thereby highlighting the need for investors to expand the current facilities. On the other hand, the EU battery regulation, which promotes recycling with mandatory recycling shares, leads to a considerable dropping of shares in the emerging repurposing market. Our study concludes that, to achieve a circular economy for EV batteries, balanced support for recycling and repurposing is needed. We call for a complementary policy framework that ensures that repurposing is an integral part of the closed-loop system.