Crypto Popularity Could Pose Stability Risk, EU Watchdog Warns, as It Ponders New Powers

Fintech firms could face bank-style lending caps to stop crypto markets overheating, the European Systemic Risk Board said.

AccessTimeIconMar 31, 2022 at 9:11 a.m. UTC
Updated May 11, 2023 at 5:14 p.m. UTC

European Union banks could face stricter limits on their crypto holdings to prevent the burgeoning market in virtual assets upending the financial system, the bloc’s financial-stability watchdog said.

“The entry of new institutions and the use of new financial products, some of which have quickly gained popularity (e.g., crypto assets, stablecoins, etc.), has the potential to pose risks to financial stability,” the European Systemic Risk Board (ESRB) said in a concept note published Thursday.

The ESRB, set up after the 2008 crisis and chaired by European Central Bank President Christine Lagarde, is considering whether to extend the controls supervisors can impose to protect the EU's financial system. As well as monitoring individual institutions, regulators can impose “macroprudential” measures to limit larger problems, for example, to ensure that banks can’t give mortgages that are too generous compared with a borrower’s salary and calm overheating housing markets.

The ESRB suggested that those tools should extend beyond banking into other institutions, including new financial technology players, and large companies such as Meta (FB) and Alphabet's (GOOG) Google.

The ESRB also called for “quick adoption and implementation” of the EU’s Markets in Crypto Assets Regulation (MiCA), which it said would help control financial stability risks. Late-stage negotiations between the European Parliament and national governments on the rules begin Thursday.

In a November consultation that closed recently, the European Commission asked whether supervisors need extra powers to tackle the financial stability risks of crypto-based products and competitive pressures from the potential arrival of new fintech participants.

Fuller advice on that question is due from the ESRB “in the coming weeks,” it said today. So far the commission’s idea has got a mixed reception from among the EU’s 27 member countries.

In a letter dated March 17, Swedish authorities said it wasn’t clear if existing rules were enough to tackle crypto risks. Just four days later, the Italian central bank suggested keeping the focus on more traditional policies that look at individual banks, as crypto exposures are “currently tiny ... the use of crypto assets for payments is limited to niche groups."

International standard setters, aided by the ECB, are also looking at how much lending banks should be allowed to conduct against their crypto holdings. An initial proposal made by the Basel Committee on Banking Supervision, the global standard-setter for banking regulation, last year was rejected following criticism from the financial sector that it was too cautious, in effect ruling out any incentive for banks to get into the market.


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Jack Schickler

Jack Schickler was a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He doesn’t own any crypto.