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
FSB Publishes Update on Meeting of RCG for MENA RegionRelated Articles
PRA and FPC Finalize Changes to Leverage Ratio Framework in UK
The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA
CFPB Proposes Rule on Small Business Lending Data Collection
The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.
PRA Decides to Maintain O-SII Buffers for Another Year
The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.
FSB Report Assesses Implementation of Recommendations on Stablecoins
The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.
APRA Updates Loan Serviceability Expectations for Home Lending
In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
CPMI and IOSCO Consult on Guidance on Stablecoin Arrangements
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.
EBA and EIOPA Set Out Work Priorities for 2022
The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.
MFSA Issues Reporting Updates and Guidance for Banks
The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.
EC Publishes Decision on List of Equivalent Third Countries Under CRR
The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).
EC Rule on Contractual Recognition of Write-Down and Conversion Powers
EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.
