The European Central Bank (ECB) has urged the European Union (EU) to close a legal loophole that allows some banks to operate in the crypto space without proper oversight. The ECB’s supervisory board chair, Andrea Enria, said that the current EU regulation on crypto assets is insufficient and needs to be fixed.
EU regulation on crypto assets
The EU regulation on crypto assets, known as the Markets in Crypto-Assets (MiCA) regulation, was proposed by the European Commission in September 2020. The regulation aims to provide a comprehensive framework for the issuance, trading, and supervision of crypto assets in the EU. The regulation also covers stablecoins, which are digital tokens that are backed by fiat currencies or other assets.
The MiCA regulation is expected to be adopted by the EU Parliament and Council by the end of 2023, and to enter into force in 2024. However, the regulation has a loophole that allows some banks to offer crypto-related services without being subject to the ECB’s supervision.
The loophole and the risk
The loophole stems from the fact that the MiCA regulation only applies to crypto assets that are not considered as financial instruments under the existing EU law. Financial instruments are defined by the Markets in Financial Instruments Directive (MiFID), which covers securities, derivatives, and other tradable contracts.
However, some crypto assets, such as tokenized securities or crypto derivatives, may fall under the definition of financial instruments, and thus be exempt from the MiCA regulation. This means that some banks that deal with these crypto assets may not have to comply with the MiCA rules, such as capital requirements, risk management, and consumer protection.
This poses a risk to the financial stability and integrity of the EU, as well as to the safety of the customers and investors. Enria warned that some banks may use the loophole to engage in risky or speculative activities in the crypto space, without being subject to the ECB’s supervision. He said that this could create a “regulatory arbitrage” and a “level playing field” issue among the banks.
The solution and the challenge
Enria called for closing the loophole by extending the MiCA regulation to cover all crypto assets, regardless of whether they are financial instruments or not. He said that this would ensure a consistent and harmonized approach to the supervision of crypto activities in the EU. He also said that the ECB is ready to cooperate with the EU authorities and the national supervisors to implement the MiCA regulation effectively.
However, closing the loophole may not be easy, as it would require amending the MiFID definition of financial instruments, which is a complex and lengthy process. Moreover, some banks may resist the change, as they may prefer to operate in the crypto space with less regulation and more flexibility. Therefore, the ECB may face some challenges in convincing the EU and the banks to adopt its proposal.