May 17, 2019

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

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