The European Central Bank will this week warn euro-zone countries of the dangers posed by national regulators ahead of pending EU cryptocurrency regulations, highlighting the difficulties of introducing efficient supervision of the rapidly evolving “wild west” sector.
The European Commission agreed last week on a sweeping set of standards for the crypto industry. But the central bank is concerned about a messy patchwork of national regulations that regulate the overlap between banks and crypto firms before the package is fully implemented, 18 months after it becomes law next year.
It will raise the urgent need for “harmonization” at a meeting of its supervisory board Tuesday, people familiar with the discussions said.
“It’s quite a challenge,” said a national regulator in a eurozone country. “With Mica [the EU’s digital regulation package] In 18 months it’s better to say ‘until it’s in, do what you want, there’s no regulation’ or better to try and get a handle on it?’
Germany has been most proactive in its efforts to tame digital currencies. It used the EU 2020 Anti-Money Laundering Directive to require companies that hold and trade crypto assets on behalf of customers to apply for special licenses under German banking law.
Other eurozone countries, such as the Netherlands, initially focused their efforts on money laundering compliance registries, but several have considered broader measures after Russia’s invasion of Ukraine revealed the possibility of crypto being used for illicit means such as evading money. sanctions. Consumer protection concerns have also increased as the value of bitcoin, the largest cryptocurrency, has fallen more than 70 percent from its peak.
Another country-level regulator said national authorities “under pressure from their industry must come up with answers”. Some banks have pushed for clarity on what activities they can safely engage in, while some crypto firms have pushed for regulation to boost the credibility of their industry, while others have argued for a lighter touch.
The ECB is concerned about potentially ruling on crypto-related licenses pursued by banks in the absence of a pan-European framework, said a person familiar with the matter. It will discuss that issue – and the wider need for harmonization of eurozone approaches – with regulators from its 19 member states at tomorrow’s meeting of the supervisory board.
Andrea Enria, chair of the ECB’s banking supervisory board, last week told MEPs in Brussels that the central bank saw “differences in national regimes surrounding crypto” and that a level playing field “would be important” . He said it would “focus on internal principles to ensure you have smooth authorization”. [and] licensing process for banks engaged in these fields”.
The intervention may meet resistance from countries that want to move forward on their own, but some are likely to support the ECB’s efforts. “Clearly there is a question of both harmonization and timing; the full implementation of Mica will take quite some time, so it is important to act quickly,” said a person familiar with discussions at a third national regulator.
Germany’s BaFin watchdog said its regime was “broadly equivalent” to the planned Mica legislation. It has so far granted four licenses to fintechs Coinbase Germany, Kapilendo Custodian, Tangany and Upvest and none to traditional banks, which would also need a license if they expanded into crypto custody.
More than 20 license applications were reviewed, BaFin added, while some were rejected because applicants failed to meet the watchdog’s requirements, which cover aspects from internal controls and IT platforms to anti-money laundering controls.
A lawyer said it was “not unusual” for Germany to be an early mover on regulation, “especially where there are consumer issues”. The ECB declined to comment on what would be discussed at the meeting of the supervisory board.