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EU August’s Licensing of Crypto Activities and Banks’ Bitcoin Holding Cap

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Licensing of Crypto-asset Activities

On 17th August, the European Central Bank (ECB) published a supervision newsletter highlighting its focus on harmonising frameworks governing crypto assets by working closely with the national supervisors.

The newsletter admits that there is currently no consistent approach within the EU governing crypto asset activities and services, although this will change once the EU-wide regulatory frameworks like MICA are finalised.

In terms of the ongoing initiatives targeting harmonisation, the newsletter highlights that there

is ongoing work within the Single Supervisory Mechanism (SSM) on banks’ digital transformation, including the role of crypto technologies, that will result in horizontal analysis by the end of 2022. 

The newsletter also reminds us of the Capital Requirements Directive (CRD) criteria, that the ECB applies alongside the relevant national competent authorities, when assessing licensing requests covering crypto assets activities and services:

  • Business models: how the proposed activity matches the overall activity and risk profile of the institution;
  • Internal governance: whether the institution’s policies and procedures are adequate to identify and assess risks unique to crypto-assets; and
  • Fit and proper assessments: here the same general fit and proper criteria apply as in any licensing procedure, including IT competence.

EU Lawmakers Seek to Cap Banks’ Bitcoin Holdings

The EU Parliament issued a proposal on 11th August for amendments in the regulation governing bank capital requirements. Among the proposed requirements, the ones impacting crypto assets divide the crypto assets into two groups and set what is the maximum exposure the banks can have against these groups.

The proposal defines the two groups of crypto assets as follows:

  • Group 2 of crypto assets includes
    • ‘DLT Financial Instruments’ in he EU DLT Pilot Regime
    • ‘asset reference tokens’, ‘emoney tokens’ as defined in MICA
  • Group 1 of crypto assets includes
    • Other crypto assets as defined in MICA

The proposal stipulates that the total exposure of a credit institution to Class 2 crypto-asset exposures must not be higher than 1% of the institution’s Tier 1 capital.

The risk weighting of Class 1 crypto assets should be subject to the same risk weights as the assets they reference and hence applicable to the same exposure rules as these assets.

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