In response to a request from the European Council and Parliament, ECB published an opinion on the proposed regulation on markets in crypto-assets. In the opinion, ECB welcomed the EC initiative to establish an EU-level harmonized framework for regulating crypto-assets and related activities and services. However, ECB opines that further adjustments are warranted with respect to certain aspects of the proposed regulation; some of these aspects relate to the responsibilities of ECB, Eurosystem, and the European System of Central Banks in the context of the prudential supervision of credit institutions and financial stability. Where ECB has recommended amendments to the proposed regulation of EC, specific drafting proposals have been set out in a technical working document that accompanies the opinion.
The initiative on the harmonized framework for regulating crypto-assets and related services forms a part of the digital finance package adopted by EC in September 2020. ECB believes that the harmonized framework is critical to prevent fragmentation in the Single Market. In its opinion, ECB welcomed the aim of the proposed regulation, which is to address the different levels of risk posed by each type of crypto-asset, balanced with the need to support innovation. With regard to the definition of crypto-asset introduced by the proposed regulation, ECB notes that the proposed regulation contains a wide, catch-all definition. However, to avoid diverging interpretations at the national level on what may or may not constitute a crypto-asset under the proposed regulation, the scope of application of the proposed regulation should be further clarified. This would help to support the provision of crypto-asset services on a cross-border basis and to establish a truly harmonized set of rules for crypto assets. In its opinion, ECB also sets out the following recommendations on financial stability and prudential supervisory aspects of the proposals:
- Supervisory arrangements for issuers of significant e-money tokens. The proposed regulation establishes a dual supervisory arrangement for issuers of significant e-money tokens, jointly supervised by the responsible national competent authority and EBA. When the issuer of the significant e-money tokens is a credit institution, dual supervision would give rise to further complications. Specifically, where the issuer of significant stablecoins is a significant credit institution, the supervisory responsibilities and tasks of EBA and ECB should also be clarified to avoid potential duplications and conflicts. In such a scenario, the EBA obligation to enforce the compliance of an issuer with the requirements laid down in the proposed regulation should not encroach on the supervision of prudential requirements enforced by the ECB in its banking supervisory role.
- Requirements for own funds and the investment of reserve assets. The prudential and liquidity requirements imposed on issuers of stablecoins should be proportionate to the risks that those tokens could pose to financial stability. However, these additional requirements may not be sufficient to address growing risks in certain cases. In this context, additional Pillar-2-type powers should be accorded to the supervisor, especially for significant issuers, given the higher risks to financial stability. Specifically, significant stablecoin issuers should be required to conduct, on a regular basis, stress testing that takes into account severe but plausible financial and non-financial stress scenarios. Additionally, ECB points out that issuers of both asset-referenced and e-money tokens may be equally exposed to the risk of "runs," with possible contagion risks to the rest of the financial system and attendant risks to financial stability. It is, therefore, important that such issuers are subjected to harmonized requirements concerning the investment of the reserve assets, to ensure a level playing field. Finally, ECB states that the proposed regulation does not impose any restrictions to prevent a possible concentration of custodians or investment of the reserve assets. The lack of limits to possible concentration could undermine the safety of the reserve assets and subject them to idiosyncratic risks of particular custodians and debt issuers. Thus, the proposed regulation should provide for the introduction of safeguards to prevent such concentration, to be developed in regulatory technical standards.
- Prudential supervisory aspects. Where significant credit institutions issue significant asset referenced tokens and e-money tokens, the dual supervisory arrangement between the relevant national competent authority and EBA would apply. In this context, it is necessary to further explain what the EBA supervision would entail in practice. Furthermore, this dual supervisory arrangement would also need to consider the supervisory role of ECB as far as significant credit institutions are concerned, with clearer coordination mechanisms, including a clear notification framework, and inclusion of ECB in its role as prudential supervisor in the college. Finally, the proposed regulation should refer explicitly and consistently to the prudential supervisory authorities for both significant asset-referenced tokens and e-money tokens.
Related Link: Opinion (PDF)
Keywords: Europe, EU, Banking, Securities, Cryptoassets, Stablecoin, Distributed Ledger Technology, Opinion, Digital Finance Strategy, EC, ECB
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