ECB Paper on Implications of Crypto-Assets for Financial Stability
ECB published an occasional paper that examines the implications of crypto-assets for financial stability, monetary policy, and payments and market infrastructures (PMIs). The paper summarizes the outcomes of the analysis of ECB Internal Crypto-Assets Task Force (ICA-TF). It proposes a characterization of crypto-assets in the absence of a common definition and analyzes recent developments in the crypto-assets market, also unfolding the links with financial markets and the economy.
The ICA-TF analysis shows that crypto-assets do not currently pose an immediate threat to the financial stability of the euro area, as their combined value is small relative to the financial system. In the current regulatory framework, crypto-assets can hardly enter EU financial market infrastructures. The sector nevertheless requires continuous careful monitoring since crypto-assets are dynamic and linkages with the wider financial sector may increase to more significant levels in the future. Disjointed regulatory initiatives at the national level could trigger regulatory arbitrage and, ultimately, hamper the resilience of the financial system to crypto-asset market-based shocks.
The report mentions that, from a prudential viewpoint, crypto-assets should be deducted from common equity tier 1 (CET1) as part of a conservative prudential treatment. The Capital Requirements Regulation (CRR) is not tailored to crypto-assets in light of their high volatility. Without prejudice to the ongoing work at BCBS, a possible way forward for this conservative prudential treatment is the Pillar 1 deduction from CET1 similar to that of the other assets that are classified as intangible assets under the accounting framework. Independent of the stipulated prudential treatment, financial institutions undertaking exposures in crypto-assets are expected to put in place an appropriate risk management framework commensurate to the risks posed by the unique characteristics of these activities. Furthermore, any outstanding risks not adequately covered under Pillar 1 could be addressed via supervisory action under a proportional approach. With regard to liquidity requirements, crypto-assets are not included in the list of eligible instruments for the liquidity coverage ratio liquidity buffer. The holistic approach of the supervisory review and evaluation process allows for the review of crypto-assets’ direct and indirect investments—when significant—from different risk perspectives, including credit and counterparty risk, market risk, operational risk, governance, solvency risk, and liquidity risk.
Under the EU law as it stands, crypto-assets do not appear to fit under any of the subject-matter-relevant EU legal acts. Given the current state of law, there is limited scope for public authorities to intervene. Still, there could be avenues for the regulation, at the EU level, of crypto-assets business at the intersection with the regulated financial system—that is, aimed at crypto-asset “gatekeeping” services, namely crypto-assets custody and trading/exchange services. In a context where a large part of crypto-asset-related activity is carried out by centralized service providers, this setup is no different from the traditional financial intermediation business; hence, a similar framework could be used to regulate and authorize the activities of (centralized) crypto-asset gatekeepers. However, the above regulatory approach is not suited to decentralized gatekeeping activities that do not foresee the involvement of an identifiable intermediary; in this case, a principles-based approach, complemented by a formal mechanism to validate the observance of such principles, could be considered.
Related Link: Occasional Paper (PDF)
Keywords: Europe, EU, Banking, Securities, PMI, Financial Stability, Crypto-Assets, ICA-TF, FMI, CCP, CET 1, Fintech, ECB
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
US Agencies Adopt Amendments to Simplify Regulatory Capital RulesNext Article
APRA Publishes Corporate Plan for 2019-2023Related Articles
PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA Finalizes Standards on Methods of Prudential Consolidation
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA Updates List of Other Systemically Important Institutions in EU
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS Report Concludes Basel Risk Categories Can Capture Climate Risks
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities Welcome FSB Review of their Remuneration Regime
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA Letter on Addressing Risks from Use of Deposit Aggregators
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA to Amend Banking Act and Rules in Coming Months to Transpose CRD5
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC Delegated Regulation on Specialized Lending Exposures Under CRR
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI Proposes to Enhance Assurance Expectations for Basel Returns
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB Issues Results of Benchmarking Analysis of Recovery Plans of Banks
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.