ECB informs on digital assets licensing criteria

As the ECB puts it, there is currently no harmonised regulatory framework governing crypto asset activities and services in the EU. This will change with the finalisation of several regulatory initiatives at European and international level that will lay down the broader regulatory framework under which crypto activities are allowed, and how banks should manage the risks they pose.

Within the EU, the Council presidency and European Parliament recently reached a provisional agreement on the markets in crypto assets (MiCA) proposal, which will bring crypto assets under a regulatory framework. And internationally, the Basel Committee on Banking Supervision is monitoring banks’ exposures to crypto assets and will issue its detailed rules on the prudential treatment of such exposures in due course.

Crypto still diverse in regulation

In the meantime, national frameworks governing crypto assets diverge quite extensively. In Germany, certain crypto activities are subject to a banking licence requirement and to date, several banks have requested to be authorised to conduct these licensed activities. It is in this context that the ECB is taking steps to harmonise the assessment of licensing requests.

The ECB notes that licensing of credit institutions is essential for the public regulation and supervision of the European financial system. Confidence in the financial system depends upon public awareness that only licensed institutions are operating within it. At the same time, licensing should not stifle competition, financial innovation, or technological progress, as the bank says.

Crypto asset markets are developing apace, with banks considering whether to get involved, and it is the role of the European Central Bank – as the authority in charge of banking authorisations in European banking supervision – to ensure they do so safely and soundly, while respecting the above principles. For this purpose, the ECB works closely with the national supervisors to ensure a consistent approach and high standards across countries.

The criteria in use

Like for other licensing procedures, the ECB and the relevant national competent authority apply the Capital Requirements Directive (CRD) criteria when assessing licensing requests covering crypto-asset activities and services. In doing so, the ECB pays particular attention to the following:

• business models: how the proposed activity matches the overall activity and risk profile of the institution;

• internal governance: whether the institution’s policies and procedures are adequate to identify and assess risks unique to crypto assets; and

• fit and proper assessments: here the same general fit and proper criteria apply as in any licensing procedure, including IT competence. The higher the complexity or relevance of the crypto business, the higher the level of knowledge and experience in the field of crypto should be. Senior managers or board members with relevant IT knowledge and chief risk officers with robust experience in this area are important safeguards.