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
EBA Publishes Report on STS Framework for Synthetic SecuritizationRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
