Key takeaways:
- EBA Takes Further Steps to Assess Risks from Non-Bank Financial Institutions, Including Cryptocurrency Entities
- People who hold more than 10% in a crypto company will be vetted for sanctions or convictions
In a move to enhance the resilience of the European Union’s banking sector, the European Banking Authority (EBA) is set to intensify efforts to assess the potential impact of strains in non-bank financial institutions (NBFIs), with a particular focus on cryptocurrency-related entities.
EBA Chairman José Manuel Campa has voiced concerns about the need to strengthen the connections between traditional banks and various financial firms operating outside the regulatory scope.
Campa emphasized the importance of gaining a comprehensive understanding of the entire underlying chain in NBFIs, as these entities, often referred to as shadow banks, collectively hold nearly half of the world’s substantial $219 trillion in financial assets.
This sector encompasses cryptocurrency firms, holding significant assets, hedge funds, and private capital groups.
With growing apprehension that these entities, operating without the same oversight as traditional banks, could pose a systemic threat to global finance, the EBA is taking proactive measures.
The EBA has already taken strides to address the potential role of cryptocurrency in creating stress within the financial system. In November, the regulator released draft rules outlining liquidity and capital requirements for stablecoin issuers under the new Markets in Crypto-Assets (MiCA) regulation introduced by the European Union.
Campa affirmed the commitment to do more, including predicting how strains on NBFIs might impact the broader financial system.
The EBA plans to collaborate with the European Systemic Risk Board and the Financial Stability Board to develop a more profound understanding of how shocks in shadow banking can reverberate through the wider financial system.
Assessments are underway to analyze banks’ balance sheet exposures to non-banks, including loans, with the aim of identifying potential risks and mitigating them effectively.
In a bid to regulate the cryptocurrency space, the EBA has proposed rules targeting individuals holding more than 10% of a crypto company, subjecting them to scrutiny for sanctions or convictions.
Additionally, the regulator advocates for enhanced monitoring by crypto companies to detect potential money laundering activities, especially involving self-hosted crypto wallets or privacy coins.
The broader regulatory landscape for cryptocurrencies in the EU began taking shape in 2020, culminating in a package of regulatory acts. Although the law will officially come into force shortly, specific rules for cryptocurrency exchanges are slated to apply from December 2024.
Notably, the EBA’s proactive stance aligns with global efforts to increase oversight of stablecoins, crypto firms, and asset managers, reflecting the shared commitment of regulators on both sides of the Atlantic to address potential financial stability gaps in the evolving landscape of non-bank finance and cryptocurrency.
