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ECB harmonizes licensing for crypto-asset activities

ECB harmonizes licensing for crypto-asset activities

European fund managers are gaining ground

The authorization of credit institutions is essential for the public regulation and supervision of the European financial system. Indeed, trust in the financial system depends on public awareness that only licensed institutions operate in it. At the same time, licensing should not stifle competition, financial innovation or technological progress. Crypto-asset markets are growing rapidly, with banks considering getting involved, and it is the role of the European Central Bank – as the authority in charge of banking authorizations within the framework of European banking supervision – to ensure they do so safely and securely, while adhering to the above principles. In this regard, the ECB works closely with national supervisors to ensure a consistent approach and high standards across countries.

There is currently no harmonized regulatory framework governing crypto-asset activities and services in the EU. This will change with the finalization of several regulatory initiatives at European and international levels that will establish the broader regulatory framework within which crypto activities are permitted and how banks must manage the risks they pose. Within the EU, the Presidency of the Council and the European Parliament have recently reached a provisional agreement on the proposal for crypto-asset markets (MiCA), which will integrate crypto-assets into a regulatory framework. And internationally, the Basel Committee on Banking Supervision monitors banks’ exposures to crypto-assets and will publish its detailed rules on the prudential treatment of such exposures in due course. Meanwhile, national frameworks governing crypto-assets diverge quite widely. In Germany, certain crypto activities are subject to a banking license requirement and to date, several banks have applied to be allowed to conduct these activities under license. It is in this context that the ECB is taking steps to harmonize the assessment of license applications.

As with any other authorization procedure, the ECB and the relevant national competent authority apply the criteria of the Capital Requirements Directive (CRD) when assessing authorization applications covering crypto activities and services. -assets. In doing so, the ECB pays particular attention to the following points:

  • Business plans: how the proposed activity corresponds to the overall activity and risk profile of the institution;
  • internal governance: whether the institution’s policies and procedures are adequate to identify and assess the risks specific to crypto-assets; and
  • adequacy and adequacy assessments: Here, the same general fit and proper criteria apply as in any licensing procedure, including computer proficiency. The higher the complexity or relevance of the cryptographic activity, the higher the level of knowledge and experience in the field of cryptography should be. Senior executives or board members with relevant IT knowledge and risk managers with strong experience in this area are important safeguards.

Of course, crypto-assets highlight certain types of risks, starting with operational and cyber risks, and the ECB is also working to assess them. They include, for example, the theft of cryptographic keys or compromise of login credentials, as well as the risks associated with the use of special technologies and subcontracting agreements with third-party suppliers. Similarly, given that crypto-assets are considered subject to risks associated with anti-money laundering/anti-terrorist financing (AML/CFT), internal governance arrangements and processes should take into account the risk profile AML/CFT of the institution’s crypto-assets. Here, the ECB relies on inputs from national anti-money laundering authorities and financial intelligence units. For liquidity and capital, no specific capital requirements are still defined, taking into account the ongoing work of the Basel Committee on Banking Supervision to deal with the risks posed by crypto-assets.

Above all, in close cooperation with national supervisors, the ECB will strive to improve the consistency of prudential assessments between national regimes.

So where do we go from here? Work is ongoing within the Single Supervisory Mechanism (SSM) on the digital transformation of banks, including the role of cryptographic technologies, which will culminate in horizontal analysis by the end of 2022. And this growing activity will remain, in any case, a priority area for European banking supervision in the years to come.

Source: ECB


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