"Thanks for the invitation and the opportunity to share with you my thought on a such complex issue.
Let me start by noting that the problems posed to regulators and supervisors by Crypto assets are not new and go back to the early eighties of the last century when the increasing use of technology in financial markets substantially changed the microstructures of markets and the role of financial intermediaries. The key issue was and still is how to find the right balance between the need to ensure financial stability, market integrity and investor protection while avoiding to stifle financial innovation and the potential benefits it may have.
A second major issue is that financial innovation allows to unregulated entities (e.g. IT companies, social networks, etc) to provide financial services and products: here the problem is that the traditional approach to regulation based on entities and not on activities may prove not adequate at addressing risks and may create an unlevelled playing field in the competition between unregulated entities and regulated ones.
It is true that today the exponential speed of innovation adds a new dimension to the complexity of addressing the regulatory challenges posed by digitalization of financial markets and products, however focusing on regulated entities only implies that risk may pile up outside the borders of regulation with the potential to substantially impact financial stability where a crisis occurred (to go back to the last century, remember the lessons of the LTCM collapse and the spillover effects of 1997/8 crisis in Russia and Asia).
True, strengthening the controls and prudential requirements at regulated entities when dealing with unregulated entities or trading or offering digital products on behalf of their client is the first line of defense.
Considering the growing demand for crypto-assets, we believe that the definition of a prudential treatment is a key component for a regulatory framework on crypto-assets that would help mitigate the related risks and place these new instruments in a regulated environment. Only in this way intermediaries could set up a sound and hopefully attractive offer in this new market segment. As ABI, we actively contributed to the work carried out by Basel Committee on Banking Supervision (BCBS) aimed at the creation of an internationally harmonized standard for the prudential treatment of crypto assets by participating at both the two public consultation rounds (June 2021 and June 2022) that led to the publication of the final report in December.
The final BCBS framework remains quite conservative in terms of capital requirement and the structure is generally unchanged from the proposal set out in the second consultation, e.g., categorization in the four groups (Group 1a, 1b, 2a, 2b) . The final standard does include some improvements and enhancements we were advocating for which could contribute to create a level playing field for all operators who are about to have exposures in crypto assets and/or to offer services in this area.
However, we believe there may be still room for improvement of this prudential scheme. The proposed prudential treatment of Group 2 crypto-assets (1250% risk weight) and the 2% of the Tier-1 limit for total exposures represent an obstacle to the provision of those services that are closely dependent on such exposures. In fact, banks are penalised since they would not compete on an equal footing with other entities, i.e., FinTechs, BigTechs and new players like Crypto-Asset Service Providers (CASPs) which are not subject to the same capital requirements. Looking at the regulatory proposal at the European level and the MiCAR proposal as a reference, CASPs would be held to less strict regulatory and supervisory requirements.
A prudential treatment will have to introduce the appropriate precautions to maintain financial stability, while ensuring consumer protection. Thanks to their expertise in the risk management, banks could introduce the same appropriate safeguards they have on other asset classes within the crypto-assets service offerings. In this regard, it is key to remove any competitive advantage of less reliable actors to create a robust and resilient market and avoid any recurrence of what already happened.
That’s why I am strongly convinced that we need a more comprehensive regulatory framework that goes beyond the traditional approach (including increasing prudential requirements on regulated entities) that ensures that the risks and challenges posed by crypto assets are adequately addressed independently from the entities that deal in those assets."
