The European Central Bank’s Internal Crypto-Assets Task Force (“ICA-TF”) issued a report analysing the implications of crypto-assets for financial stability, monetary policy, payments and financial markets infrastructures (“FMIs”).

The report focuses on crypto-assets, which lack an underlying financial claim or liability and do not embody any proprietary right against an entity. According to ICA-TF, under such definition, crypto-assets currently do not fit in the perimeter of the European Union (“EU”) legislation except the anti-money laundering framework. This limits the possibility for regulatory intervention, which is further complicated by the lack of governance due to the distributed nature of crypto-assets.

The report did not identify any immediate threat to EU financial stability. Due to existing regulations, it is difficult for crypto-assets to enter EU FMIs and banks do not seem to have systemically relevant holdings of crypto-assets. The report, however, calls for continuous vigilance, recognizing potentially growing exposures as a result of the gradually maturing crypto-assets ecosystem, as well as rising interest among hedge funds and asset managers.

In the absence of a common taxonomy, uncoordinated regulatory approaches could incentivise regulatory arbitrage. The ICA-TF therefore suggests that an EU level regulation should first target the “crypto-asset gatekeepers” such as custody, trading and exchange services providing the entry point to retail customers and regulated entities.

Recognizing the unsuitability of an approach focused on intermediaries in the decentralized networks, the ICA-TF proposes to subject these to a minimum set of principles. Such principles would aim to ensure the networks’ technological integrity, transparency of algorithms and protocols, cyber-resilience and regulatory compliance.

The report concludes by recognizing that unintended consequences may flow from regulating gatekeepers only. A possibly uneven playing field resulting in a shift to decentralized networks should be assessed in a holistic cost-benefit analysis.