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EBA Opens Consultation on Liquidity Stress Test Guidelines for Crypto Assets

The European Banking Authority (EBA) released a consultation paper dated 08 November 2023, outlining proposed guidelines for liquidity stress testing of asset reference tokens as mandated by the newly instituted Regulation (EU) 2023/1114. This document, identified as EBA/CP/2023/27, sets forth the framework for common reference parameters for these stress tests, reflecting the regulatory focus on the stability and resilience of the crypto market.

The consultation seeks feedback on several key areas, with the EBA inviting comments particularly on the specific questions summarized in section 5.2 of the paper. Stakeholders are encouraged to respond with evidence-backed viewpoints, ensuring their responses are clear, rational, and directly related to the queries posed.

The deadline for submitting comments has been set for 08 February 2024, indicating a comprehensive review period. This timeline suggests the EBA’s commitment to a thorough consultative process with industry players, aiming for robust regulatory practices.

In tandem with the call for feedback, the EBA has underscored the importance of data protection, adhering to Regulation (EU) 1725/2018, which safeguards individual data amidst the processing by the EBA. This is a critical assurance for stakeholders concerned with the confidentiality of their responses.

The EBA has made provisions for responses to be kept confidential upon request, in line with its public access to documents policy. Any decision to not disclose certain responses will be open to review by the EBA’s Board of Appeal and the European Ombudsman, ensuring a transparent and fair process.

The draft guidelines come in response to Article 45(4) of Regulation (EU) 2023/1114, requiring issuers of significant asset-referenced tokens to conduct regular liquidity stress tests. This regulation extends to electronic money institutions issuing e-money tokens that are considered significant under Article 58(1), point (a), of the same regulation. Competent authorities of member states may also require these tests from issuers that are not deemed significant, emphasizing a broad scope of regulatory oversight.

As the crypto asset landscape continues to evolve, the EBA’s proposed guidelines mark a proactive step towards establishing a more secure and resilient financial ecosystem. The finalized guidelines, post-consultation, are expected to shape the conduct of liquidity stress tests, ensuring that issuers of crypto assets are prepared for adverse market conditions.

EU Authorities Probe Bank-NBFI Ties, Including Crypto

Both the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB) have begun an important inquiry into the complex ties that exist between conventional banks and non-bank financial institutions (NBFIs), which includes the cryptocurrency industry, which is undergoing fast development. A significant worry has been raised over the possible systemic hazards that might arise from these linkages, particularly in high-pressure financial conditions. This action highlights this increasing concern.

Nearly half of the world’s financial assets, which are estimated to be worth $219 trillion, are now held by non-bank financial institutions (NBFIs), which include hedge funds, private equity companies, money market funds, and crypto businesses. New dynamics have been brought into the financial ecosystem as a result of this rapidly expanding industry, which simultaneously offers advantages related to diversification while also bringing new problems. The proliferation of digital currencies in particular has attracted the attention of investors as well as the scrutiny of regulatory authorities. By means of its recently implemented Markets in Crypto Assets (MiCA) law, the European Union is making an effort to bring the crypto framework of its member states into conformity with one another.

The European Banking Authority (EBA), which is in charge of performing stress tests on EU banks every two years, is putting more and more of its attention on the possible contagion effects that may be caused by non-bank financial institutions (NBFIs). The Chair of the European Banking Authority, José Manuel Campa, underlined the need of an understanding of the “whole underlying chain in NBFIs” in order to evaluate the effects that a shock to shadow banking might have on the larger financial system. In accordance with this, the European Banking Authority (EBA) has suggested regulations for cryptocurrency enterprises to guarantee thorough due diligence and transaction monitoring, as well as drafted guidelines that target liquidity and capital requirements for stablecoin issuers.

The European Bank for Economic Cooperation (EBA) and the European Securities and Exchange Board (ESRB) are working together to analyze the intricate web of relationships that exist between banks and non-bank financial institutions (NBFIs). The effort was conceived out of worries over the potential for stress within the non-bank financial institution (NBFI) sector, which includes crypto businesses, hedge funds, and private capital groups, to spread to the banking sector, which may possibly lead to greater systemic difficulties. Campa brought attention to the fact that while the direct connections between banks and non-banks have been evaluated, the mechanisms of indirect transmission continue to be an equally important topic of research. The probe is a component of a larger worldwide effort to regulate the shadow banking industry and reduce the risks to the stability of the financial system.

EBA Issues Updated Guidelines for Crypto Asset Service Providers

The European Banking Authority (EBA) has made significant strides in the regulation of crypto asset service providers (CASPs), issuing updated guidelines aimed at mitigating risks associated with money laundering and terrorist financing. This move, announced on January 16, 2024, is part of a broader effort to harmonize regulatory approaches across the European Union and integrate crypto companies into the existing financial regulatory framework.

The amended guidelines extend the European Union’s Anti-Money Laundering and Counter-Terrorist Financing measures to encompass all European crypto companies. CASPs, including exchanges, wallets, and custodians, are now required to comply with stringent anti-money laundering (AML) and know-your-customer (KYC) financial regulations. The EBA’s primary aim is to standardize crypto regulations to prevent these platforms from being used for illicit activities.

With the rapid growth of the crypto industry, the EBA recognizes the increased risks due to the nature of crypto transactions. These risks are amplified by the speed of crypto asset transfers and features that can obscure users’ identities. To address these risks, CASPs are advised to utilize tools like blockchain analytics and consider risks related to anonymity-enhancing features, self-hosted wallets, and decentralized platforms. The guidelines include detailed risk assessment directives for CASPs, particularly focusing on the potential dangers associated with various products and services that facilitate transfers between companies and users.

This comprehensive approach by the EBA aligns with the European Union’s recent regulatory developments in the crypto sector, such as the Transfer of Funds Regulation (ToFR) and the Markets in Crypto Assets (MiCA) legislation. The enforcement of these guidelines is scheduled to coincide with the launch of MiCA, set for December 30, 2024. MiCA introduces specific investor protections for crypto users and offers an 18-month transitional period for CASPs to adapt to these new regulations.

Moreover, the guidelines extend beyond CASPs, affecting legacy financial institutions that interact with crypto services or customers. This reflects the EBA’s recognition of the interconnectedness within the financial system. Financial firms and credit facilities dealing with digital asset service providers or customers exposed to virtual assets are also subject to the new guidelines.

In summary, the EBA’s updated guidelines represent a crucial step towards a more secure and regulated crypto environment within the European Union. By harmonizing AML measures and extending their reach to include crypto firms, the EBA aims to mitigate the risks of financial crimes and integrate crypto assets more securely into the financial system.