EU Regulators Close Examine Banks’ Crypto Investing: A New Phase Of Supervision?

In a move concerning crypto, the European Banking Authority (EBA), in collaboration with the European Systemic Risk Board (ESRB) and the Financial Stability Board (FSB), has announced a joint initiative to investigate the interconnectedness of legacy banks with non-bank financial institutions (NBFIs)essing the banks’ balance sheet exposures to non-banks, delving into the murky waters of the NBFIs, which Campa calls an “obscure sector” characterized by diverse and often “non-homogenous” data quality.

According to FSB data, this initiative comes at a time when the total value of assets possessed by NBFIs is estimated to be above $200 trillion.

 

  1. Joint Initiative by Regulatory Bodies:
  • The European Banking Authority (EBA), European Systemic Risk Board (ESRB), and Financial Stability Board (FSB) collaborate for a joint initiative.
  • Aim is to investigate the interconnectedness of traditional banks with non-bank financial institutions (NBFIs) in the context of crypto involvement.
  1. Focus on Shadow Banking Risks:
  • EBA chair José Manuel Campa highlights the move’s goal to assess potential risks and contagion effects between banking and non-banking financial sectors, particularly in “stress scenarios.”
  • Investigation targets legacy banks’ exposure to the crypto sector, covering hedge funds, crypto platforms, and private equity.
  1. NBFIs: An “Obscure Sector” with Diverse Data:
  • EBA’s investigation delves into the non-bank financial sector, characterized as an “obscure sector” with diverse and often “non-homogenous” data quality.
  • FSB data indicates that NBFIs possess assets exceeding $200 trillion.
  1. EU’s Cautiously Neutral Stance on Crypto:
  • The EU’s crypto regulation approach has been cautiously neutral.
  • The Markets in Crypto-Assets (MiCA) Regulation, expected by 2026, is part of a broader regulatory framework.
  1. Recent EU Crypto Regulation Efforts:
  • The EU has been actively regulating crypto, including assessing banks’ digital currency exposures and imposing limits on unverified crypto users’ transactions.
  • July 2023 introduced limits of €1000 for unverified crypto users and €7000 on cash payments for the same category.
  1. Preparation for MiCA Regulations:
  • The EBA actively prepares for the MiCA regulations’ adoption, advising stablecoin issuers to comply to avoid sudden business adjustments.
  • Principles include complete disclosure of token ownership rights and risks, equitable treatment of holders, and robust reserve, recovery, and redemption arrangements.
  1. AFME’s Emphasis on DeFi Inclusion:
  • The Association for Financial Markets in Europe (AFME) strongly recommends incorporating Decentralized Finance (DeFi) within the MiCA Regulation framework.
  • Overlooking DeFi could lead to regulatory arbitrage, undermining the effectiveness of upcoming regulatory measures.

Featured image from Unsplash, Chart from TradingView source.

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