In a move that aims to foster innovation while addressing concerns over financial stability, the European Commission has put forward a proposal to facilitate the holding of stablecoins and tokenized assets by commercial lenders.
The proposal comes as a response to the European Parliament’s previous stance, which sought to discourage crypto holdings by demanding strict capital requirements.
The leaked document outlines the Commission’s intention to moderate the European Parliament’s approach. Legislators have previously proposed that banks be required to issue one euro of capital for every euro of cryptocurrency owned.
The Commission’s proposal suggests reducing the risk weight associated with stablecoins tied to non-fiat assets, like gold, from 1,250% to 250%.
The plan also stipulates that stablecoins based on fiat currencies, such as the US dollar, and tokenized assets would be regarded identically to their underlying instruments unless there are significant credit or market concerns present.
This aligns with the forthcoming Markets in Crypto Assets regulation (MiCA), set to be implemented in July 2024, which will regulate stablecoin issuers and mandate appropriate reserves.
Also Read: European Union Ministry Approves MiCA Regulation for Crypto
The Commission’s document emphasizes the need for a regulatory framework that addresses the risks posed by cryptocurrencies. It highlights concerns regarding financial stability and individual banks’ exposure to increased risks if the transmission channels between crypto markets and financial markets are not properly regulated.
The proposal includes provisions for supervisors to ensure that banks effectively manage risks related to cybersecurity, money laundering, and valuation problems associated with holding cryptocurrencies.
While the proposal offers potential benefits for tokenized assets and electronic money, traditional financial institutions have expressed reservations due to the conservative approach towards cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).
Critics argue that excessive caution could impede deal-making and hinder banks’ ability to fully explore and understand the market.
The Commission’s proposal anticipates the international Basel Committee on Banking Supervision’s detailed crypto standards, which are currently under development.
A more permanent plan will be devised by the Commission once the global standard setter finalizes its work in late 2023.
To become law, the proposal must undergo a negotiation process between the European Parliament and the European Union member states, facilitated by the Commission.
The Council, representing the member states, has yet to adopt a formal position on the capital treatment of cryptocurrencies. Closed-door meetings among negotiators will determine the final text and its implementation.
