What has happened?
The European Banking Authority (EBA) has suggested that new rules may be needed to better protect consumers from the risks associates with cryptoassets, promote market integrity and ensure that the emergence of diverging approaches to regulation does not result in an uneven playing field. The EBA also stated that the application of existing EU regulation should be done on a case-by-case basis and provided examples of when it would apply to cryptoassets.
What does this mean?
The EBA has published the results of its assessment of the applicability and suitability of EU law to cryptoassets, recommending that the European Commission undertakes further analysis to determine the appropriate response at EU level.
The EBA noted cryptoasset-related activity in the EU is relatively limited and, at this time, it does not "appear to give rise to implications for, or risks to, financial stability".
"However… typically cryptoassets fall outside the scope of EU financial services regulation… and specific services relating to cryptoasset custodian wallet provision and cryptoasset trading platforms do not constitute regulated activities under EU financial services law. Moreover, divergent approaches to the regulation of these activities are emerging across the EU", the report said.
More specifically, the EBA report examined:
- the application of current EU banking, payments, e-money and anti-money laundering laws to cryptoassets – concluding that current EU financial services laws does not apply to “a significant portion of activities involving cryptoassets”, but when considering cryptoassets on a case-by-case basis, some may qualify as ‘electronic money’ under EMD2 and ‘funds’ under PSD2;
- cryptoasset custodian wallet providers and cryptoasset trading platforms – determining that certain services related to them may not constitute regulated activities under EU law; and
- credit institutions, investment firms, payment institutions and electronic money institutions' activities involving cryptoassets and regulatory and supervisory issues – identifying the emergence of divergent approaches across the EU, which presents risks to the level playing field.
The EBA stated that a cryptoasset will qualify as ‘electronic money’ if it satisfies each element of the definition in EMD2 and may also fall within the definition of ‘funds’ for the purposes of PSD2 if it qualifies as ‘electronic money’.
Although it made clear most cryptoassets will not fall within these definitions, the report gave two clear examples of cryptoassets that could and reiterated that this must be determined on a case-by-case basis.
The EBA advised the Commission to carry out a cost/benefit analysis to assess holistically and in a balanced approach whether EU-level action is "appropriate and feasible" at this stage.
"Such a cost/benefit analysis should take account of the potential application of [distributed ledger technology] and cryptoassets beyond the financial sector, and should extend to aspects relating to the environmental impact of some cryptoasset activity," the report said.
The regulator added that the Commission is better placed to undertake this analysis since activities involving cryptoassets fall outside the scope of the supervisory remits of the competent authorities and therefore the latter do not have comprehensive data on cryptoassets activities outside the current financial services regulatory perimeters under EU and national law.
In addition, a cross-sectoral approach is needed since cryptoassets activities give rise to issues outside the financial sector.
The EBA also advised the Commission to take account of the latest recommendations and any further guidance issued by the Financial Action Task Force (FATF) in respect of what the global anti-money laundering body calls 'virtual asset' activities and, where possible, to promote consistency in the accounting treatment of cryptoassets.
In October 2018, the FATF called for countries to "urgently" take co-ordinated action to prevent virtual assets being used to launder money and to finance criminal activities and terrorism.
The call was prompted by concerns that the increasing divide in some jurisdictions that regulate this space means that bad actors will be attracted to the unregulated jurisdictions, which will jeopardise efforts to fight money laundering and terrorism financing worldwide, allowing havens for money laundering, terror finance and other types of illicit finance.
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