ESRB Publishes Report on Cryptos and DeFi; ECB Updates on Digital Euro

The report on crypto-assets and decentralized finance found that while this past year has been turbulent for crypto-assets and decentralized finance, systemic implications have not materialized. The crypto market has few interlinkages with the traditional financial sector and the real economy, and none of those links are currently significant. However, given the exponential growth and high volatility of crypto-assets, they may pose systemic risks in the future. These risks could materialize if, for example, interconnectedness with the traditional financial system increases over time, new connections are not promptly identified, or if similar innovations—such as distributed ledger technology—are also widely adopted in traditional finance. The report identifies a number of potential policy options that could enable authorities to understand better the developments and potential financial stability implications of crypto-assets. The policy options aim to ensure that authorities have the capacity to act in a timely manner to address potential systemic risks as well as inform any additional future regulatory initiatives. The policy options focus on following three areas:

• Improve the EU’s capacity to monitor potential contagion channels between the crypto-asset sector and the traditional financial sector, and within the crypto-asset sector. The aim is to promote standardized reporting and disclosure requirements for traditional financial sector institutions such as banks that are exposed to cryptos, investment funds with crypto exposures, and entities such as stablecoins issuers or e-wallet service providers in the crypto sector.
• Carry out assessments of risks posed by crypto-asset conglomerates and leverage using crypto-assets and identify potential additional actions to mitigate observed risks.
• Promote EU-level knowledge exchange and monitoring of market developments, focusing on operational resilience, decentralized finance and crypto-asset staking and lending.

The guide on qualifying holding procedures aims to clarify the supervisory approach taken by the national competent authority (NCAs) and the ECB in the assessment of qualifying holding procedures. The guide covers the scope of the persons required to undergo an assessment, how the assessment criteria are applied, and further guidance on some of the key documentation required in the assessment of qualifying holding procedures. It also provides more information on complex acquisition structures, the application of proportionality and specific procedural aspects. The guide complements the ECB’s Guide on the supervisory approach to consolidation in the banking sector. This guide is not legally binding and seeks to provide a practical tool to support proposed acquirers and all entities involved in the process of acquiring or increasing qualifying holdings, to ensure procedures and assessments run smoothly and efficiently. The Guide will be updated regularly to reflect new developments and experience gained in practice. ECB also published a feedback statement that provides an overview of the comments received and the ECB assessment of those comments.

Digital Euro. ECB conducted a prototyping exercise, from July 2022 to February 2023, to test how design choices for the digital euro could be technically implemented and integrated into the existing European payments landscape. The results show that it is possible to smoothly integrate the digital euro design choices into the existing payment landscape while leaving ample scope for innovative features and technologies. The findings also confirmed that a digital euro could in principle work both online and offline, using independent designs. The prototyping exercise included the development of a single back-end prototype (that is, a settlement engine—designed by the Eurosystem), and five different front-end prototypes (that is, user interfaces). ECB also published the full prototype application programming interface (API) specifications. The API specifications do not prejudge possible alternative designs, nor will the specific choices made for the prototypes affect any decision relating to a specific technology or functionality for the final digital euro design. ECB also published a report on the outcome of the market research on potential technical solutions for a digital euro. The market research exercise has helped the Eurosystem to better understand the current level of knowledge in the market and the existing experience in building solutions and identifying suitable technologies to potentially implement a digital euro. The findings of the prototyping and market research exercise will serve as input for both the functional and technical design of a digital euro.

Related Links

• ESRB Press Release on Crypto-assets and DeFi
• Report on Crypto-Assets and DeFi (PDF)
• ECB on Guide on Qualifying Holding Procedures
• Guide on Qualifying Holding Procedures (PDF)
• Feedback Statement (PDF)
• Letter on Digital Euro Prototyping Exercise (PDF)
• Results of Digital Euro Prototyping Exercise (PDF)