In a new report (30-page / 613KB PDF), the EBA called on the European Commission to undertake a study into "whether EU-level action is appropriate and feasible at this stage" to address issues it has flagged with the current approach to regulation.
While some cryptoassets and activities involving cryptoassets are caught by EU financial services legislation, such as rules governing electronic money and payment services, "a significant portion of activities involving cryptoassets" do not fall within the scope of current EU financial services law, the EBA said. It flagged the "highly risky" nature of some of these activities and said the lack of regulation of them presents risks to consumer protection, operational resilience, and market integrity.
In addition to its assessment of the benefits of direct regulation of cryptoassets, the EBA also considered whether regulation should limit the investment by financial institutions, such as retail banks, in cryptoassets. [–
"Whilst individuals and businesses who take the risk of cryptoasset trading and ownership require a degree of consumer protection, perhaps more concerning to the EBA is the possibility that financial institutions' exposure to cryptoassets could eventually harm consumers who never accepted such risk." said Rory Copeland, an expert in financial services regulation at Pinsent Masons, the law firm behind Out-Law,com.
Charlie Clarence-Smith of Pinsent Masons said the debate over whether cryptoassets constitute electronic money is an interesting one.
He said: "By definition, 'exchange tokens' could be electronic money if they could be represented by a claim on the issuer which to date is often the missing component. Perhaps in the future we will see a blockchain-based payment network open to merchants and consumers where issued tokens are intended as a means of payment and the actual payment; or the right to get the claim redeemed will be the underlying claim against the token issuer."
The EBA noted "divergent approaches to the regulation" taken by individual EU member states to address consumer protection risks in their own jurisdiction, but it warned "the proliferation of legislative and supervisory actions at the national level … gives rise to risks for the level playing field" across the whole of the EU.
Henry Burkitt of Pinsent Masons said: "One of the cornerstones of the success of the EU is the harmonisation of the regulation of the financial services sector. Whatever one's view of cryptoassets, they are becoming increasingly mainstream and need effective regulation, beyond the scope of the existing regime. It seems clear to me, looking at the systemic and harmonised control of the pan European financial system, that a unified approach to cryptoasset regulation is necessary to derive the greatest benefit from this asset class and protect individuals and institutions alike."
The EBA said the European Commission is best placed to analyse whether the issues it has identified are best tackled with action at EU level.
"The EBA advises the European Commission to carry out a cost/benefit analysis to assess, on a holistic basis, whether EU-level action is appropriate and feasible at this stage to address the issues identified," the EBA said. "Such a cost/benefit analysis should take account of the potential application of DLT (distributed ledger technology) and cryptoassets beyond the financial sector, and should extend to aspects relating to the environmental impact of some cryptoasset activity."
Tighter regulation of cryptoassets in the UK was recommended in the autumn last year by a body tasked with exploring whether new rules are needed. The Cryptoassets Taskforce, which brought together representatives from the UK Treasury, the Bank of England and the Financial Conduct Authority (FCA), outlined a raft of measures to be implemented by the government, FCA and HM Revenue & Customs (HMRC) to clarify and stiffen the existing regulatory framework.
Tony Anderson of Pinsent Masons said: "The FCA also highlighted the importance of ensuring a coordinated international approach beyond EU level. Global regulatory coherence and co-ordination will no doubt be fundamental for the future success of cryptoassets and initial coin offerings (ICOs)."
In the week before Christmas, HMRC published new guidance on tax treatment of cryptoassets for individuals, while the government and FCA provided further details of the action they are taking, which includes preparing new regulatory guidance and the potential introduction of new legislation.
The government and FCA's approach was set out in a response to a report by MPs on the influential Treasury Select Committee. In September 2018, the Committee had urged speedy action to address consumer protection and money laundering risks stemming from activities involving cryptoassets. In its report it said the "current 'wild west' situation" exposes retail investors to potential financial losses and leaves the market vulnerable to "manipulation".