European Banking Authority Unveils Draft Regulatory Technical Standards
This Tuesday, the European Banking Authority (EBA) unveiled a set of draft Regulatory Technical Standards (RTS) to guide financial entities in managing risks tied to crypto-assets under the Capital Requirements Regulation. The initiative is part of the European Union’s broader objective to solidly integrate cryptocurrency within its regulatory framework.
Proposed Guidelines for Banks
The proposed guidelines outline how banks should assess and disclose their exposure to various digital assets, including:
- Unbacked forms like Bitcoin
- Asset-referenced tokens associated with fiat currencies or commodities
- Tokens that are derivatives of other cryptocurrencies
The regulations delineate capital requirements across different risk types, including market risk, credit risk, counterparty credit risk, and credit valuation adjustments. Institutions will be required to employ formulas to calculate their exposure, taking into account strategies for netting, hedging, and aggregating positions for clearer financial reporting.
Alignment with International Standards
In crafting these rules, the EBA sought alignment with international standards, particularly the frameworks established by the Basel Committee regarding crypto-asset exposures. Additionally, the RTS considers the European Union’s forthcoming Markets in Crypto-Assets Regulation (MiCA). A significant revision from earlier drafts was the omission of a requirement for ‘prudent valuation’ on crypto exposures, a decision that has been positively received by industry experts. Instead, the current document elaborates on how long and short positions are to be aggregated when evaluating exposure limits.
Transitional Framework for Crypto-Asset Exposures
Given the swift changes characterizing the cryptocurrency market, these standards act as a provisional measure. As outlined in Article 501d of CRR 3, they permit flexibility in how institutions account for crypto-asset exposures while a more permanent regulatory structure is being finalized. This transitional framework will facilitate banks’ engagement in the rapidly evolving crypto space—from custody services to transaction facilitation—while upholding necessary protective measures.
Compliance and Risk Management
To align with the new RTS, institutions must revise their risk assessment frameworks and compliance infrastructures. This includes:
- Recalibrating internal capital models to reflect crypto’s inherent volatility
- Implementing robust valuation methods
- Ensuring that hedging tactics comply with the EBA’s stringent requirements
With a surge in demand for crypto services, these regulations aim to strike a balance between operational growth and risk management. Non-compliance may lead to increased capital demands and greater regulatory examination.
European Central Bank’s Stance on Cash
In a related note, the European Central Bank (ECB) reaffirmed its commitment to maintaining the relevance of physical cash amid the rising trend of digital payments. In a recent blog post, ECB Executive Board Member Piero Cipollone discussed the essential role that cash plays, emphasizing that it will not be eliminated but rather improved to function alongside new digital payment technologies, including the anticipated digital euro.
