EU Introduces Stricter Regulations for Banks Dealing with Cryptocurrencies

• Financial

The European Union (EU) has unveiled a package of measures aimed at introducing stricter regulations for banks that deal with cryptocurrencies. The move comes as part of a broader effort to protect consumers from potential crypto losses and to ensure that financial institutions are better equipped to cope with market shocks.

Stricter Capital Requirements

The European Parliament has passed a cross-party compromise that will require banks to hold more capital to protect against potential losses in cryptocurrencies. Specifically, banks will be required to disclose whether they are exposed to cryptocurrencies and to hold a euro of equity capital for every euro they hold in cryptocurrencies.

One amendment stipulates that banks must apply a risk weight of 1.250% of capital to exposures to crypto assets, which is enough to cover the full loss of their value. This move is in line with the international Basel III reforms, which aim to strengthen the resilience of the banking sector and to protect consumers from financial losses.

Shadow Banking Sector

The amendments also introduce a definition of "shadow banking," which refers to the sector of insurers, hedge funds, and investment funds that make up around half of the world's financial system and are typically less regulated than banks.

The EU has taken steps to better regulate this sector, in order to mitigate the risks associated with it. In order for the new rules to become law, the approval of the European Parliament and the EU finance ministers is required.

Furthermore, the European Central Bank (ECB) has yet to decide whether to issue a central bank digital currency (CBDC), while the European Commission will indicate the need for new laws to confirm the digital euro as legal tender and to set anti-money laundering rules.

Caroline Liesegang, Head of Prudential Regulation at AFME, said: "Today's agreement is an important step in finalizing the EU implementation of the international Basel III reforms. The Parliament has made positive steps forward via changes to the Commission's legislative proposal which should be given due consideration during interinstitutional negotiations.

More work is still needed on the crypto assets proposal to better define its scope to ensure tokenized securities are not captured. It is also vital that cross-border trading on financial markets can continue through the removal of the requirement for banks to establish a subsidiary or branch in the EU under Article 21c." “Our legislation will be the framework for a digital euro,” said Mairead McGuinness, the EU's financial-services commissioner.

“It will be negligent if Europe did nothing now, but at some point in five or 10 years had to urgently rush through something”. The amendment also requires the executive European Commission to publish a report by June 2023 analyzing the possibility of introducing credit limits for banks' exposure to shadow banks.