The ECB will warn eurozone countries about crypto-regulation

The European Central Bank will this week warn eurozone countries about the dangers of national regulators getting ahead of the pending EU cryptocurrency rules, and stresses the difficulties of introducing effective supervision of the rapidly evolving “Wild West” sector.

Last week, the European Commission adopted a comprehensive package 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 companies before the full implementation of the package 18 months after it is to be allowed next year.

It will address the urgent need for “harmonization” at a meeting of the Supervisory Board on Tuesday, said people familiar with the discussions.

“It is very challenging,” said a national regulator in one eurozone country. «With Mica [the EU’s digital regulation package] 18 months away, are you better off saying, ‘until it’s in, do what you like, there’s no regulation’ or are you better off trying to get it? ”

Germany has been the most proactive in the work of taming digital currencies. It used the EU 2020 directive against money laundering to require companies that hold and facilitate trading in cryptocurrencies on behalf of clients to apply for special licenses in accordance with German banking legislation.

Other eurozone countries such as the Netherlands initially focused their efforts on anti-money laundering registrations, but several have considered broader measures after Russia’s invasion of Ukraine highlighted the potential for cryptocurrencies to be used for illegal means such as avoiding sanctions. Concerns about consumer protection have also increased as the value of bitcoin, the largest cryptocurrency, has plummeted more than 70 percent from the top.

Another country-level regulator said national governments “pressured by their industry to respond”. Some banks have called for clarity on what activities they can safely engage in, while some crypto companies have pushed for regulation to increase the sector’s credibility, although others have argued for a lighter touch.

The ECB is concerned about potentially judging on cryptocurrency-related licenses pursued by banks when there is no pan-European framework in place, said a person familiar with the matter. It will discuss this issue – and the broader need for harmonization of approaches in the eurozone – with regulators from the 19 member states at tomorrow’s supervisory board meeting.

Andrea Enria, chair of the ECB’s Banking Supervision Council, told MEPs in Brussels last week that the central bank saw “differences in national crypto regimes” and that a level playing field “would be important”. He said it would be to “focus on internal principles to ensure you have a consistent authorization [and] licensing process for banks engaged in these areas ».

The intervention may meet with opposition from countries wishing to go further on their own, but some are likely to support the ECB’s efforts. “It is clearly a matter of both harmonization and timing; full use of Mica will take quite a long time, so it is important to act soon, ”said a person familiar with discussions with a third national supervisor.

Germany’s BaFin watchdog said their regime was “broadly equivalent” to the planned Mica legislation. It has granted four licenses so far, to fintechs Coinbase Germany, Kapilendo Custodian, Tangany and Upvest and none to traditional banks, which would also need a license if they were to expand to crypto depots.

More than 20 license applications were under consideration, BaFin added, while some had been rejected because applicants could not meet the watchdog’s requirements, which cover aspects such as internal control and IT platforms for controls against money laundering.

A lawyer said that it was “not uncommon” for Germany to be out early with regulation, “especially where there are consumer problems”. The ECB declined to comment on what would be discussed at the Supervisory Board meeting.