European Union Loophole Might Allow Banks to Circumvent ECB’s Crypto Supervision, Banking Professional Claims

European Union rules and guidelines for protecting the financial system from risks due to cryptocurrency transactions reportedly come with a loophole that enables banking institutions to circumvent certain safeguards, and these must be addressed immediately, according to the European Central Bank‘s chief supervisor Andrea Enria.

The crypto-assets market is finally beginning to recover after the spectacular collapse of digital currency exchange FTX and other major entities back in 2022. These unprecedented developments had practically crushed cryptocurrency prices, severely damaged the reputation of the volatile industry and led to a global regulatory crackdown.

According to a report by Reuters, Enria mentioned that there are several challenges for European financial regulators as they get ready to address the crypto market using approved EU and international regulations established by the Basel Committee on Banking Supervision (BCBS).

He cautioned that the European Union’s framework placed banking institutions’ activity as a ‘crypto-asset service provider’ — like serving as a custodian for customer wallets, exchanging tokens or managing crypto-assets portfolios – outside of the ECB’s remit as a banking industry regulatory authority.

This effectively prevents the ECB from having a complete view of a banking service provider’s exposure to virtual currencies and from applying appropriate safeguard measures, like a limit on how heavily a particular lender may be exposed to a single client, Enria stated.

He added that one aspect that concerns them at the moment is the possibility of “circumventing the soon-to-be-applicable prudential regulatory framework.”

He also mentioned that if crypto-asset service providers controlled by banks are “not within the scope of their prudential consolidation, the BCBS standard and especially the exposure limit may become ineffective.”

He further noted that crypto asset service providers need to be added “as a matter of urgency” to the list of financial institutions that the ECB is able to regulate under the applicable EU rules/guidelines.

He pointed out that the EU Markets in Crypto-Asset Regulation’s (MiCAR) provision that issuers of stablecoins maintain 60% of reserves in bank deposits could lead to “unintended consequences” for financial stability in the case that the cash is withdrawn.

He further stated that banking institutions must not depend “on volatile deposits, especially those of crypto-asset players” but the latter must be forced to work cooperatively with different banks when MiCAR is completely rolled-out.

MiCAR had reportedly entered into force in June and should take complete effect by the end of 2024. The Basel Committee’s standards on exposures to cryptocurrencies are set to be transposed into EU law by January 1, 2025.

Enria’s term as Chair of the ECB’s Single Supervisory Board will be over toward the end of 2023, when he is to be replaced by Claudia Buch, presently the Bundesbank’s VP.

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