Cryptocurrencies: ECB prepares rules for banks against “regulatory Wild West”

Crypto-asset markets are developing rapidly and banks are considering whether to participate in them, and it is up to the European Central Bank-as the authority responsible for banking authorizations under European banking supervision-to ensure that they do so in a safe and sound manner.

With this in mind, the ECB says it is ready to harmonize the rules by which banks offer cryptocurrencies, to make sure that credit institutions in individual Eurozone countries have the necessary skills and capital to operate in this area. This was announced in a note by the Frankfurt-based institution led by Christine Lagarde, after various European lawmakers often described the digital asset sector as a "regulatory Wild West" on which action should be taken as soon as possible.

Currently, there is no harmonized regulatory framework governing cryptocurrency activities and services in the EU. This situation will change as several regulatory initiatives are finalized at the European and international level that will define the broader regulatory framework within which cryptocurrency activities are permitted and how banks should manage the risks they pose.

Within the EU, the Council presidency and the European Parliament recently reached tentative agreement on the crypto-asset markets (MiCA) proposal, which will bring crypto-assets into a regulatory framework. Internationally, the Basel Committee on Banking Supervision is monitoring banks' exposures to crypto-assets and will publish detailed rules on the prudential treatment of such exposures in due course.

Meanwhile, national regulatory frameworks governing crypto-assets diverge widely. In Germany, some cryptocurrency activities are subject to banking licensing requirements and, to date, several banks have applied for authorization to conduct such activities.

As with any other authorization procedure, the ECB and the relevant national authority apply the criteria of the Capital Requirements Directive (CRD) when assessing applications for authorization for crypto-asset activities and services. In doing so, the note further states, the ECB pays particular attention to the following aspects:

business models: how the proposed activity matches the institution's overall business and risk profile;internal governance: whether the institution's policies and procedures are adequate to identify and assess the unique risks of crypto-assets; and suitability and fairness assessments: the same general suitability and fairness criteria apply here as in any licensing process, including IT competence.

The greater the complexity or significance of the cryptocurrency activity, the higher the level of knowledge and experience in the cryptocurrency field must be. Senior managers or board members with relevant IT knowledge and chief risk officers with solid experience in this area are important safeguards.

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