European watchdog bats for fresh cryptoasset regulations amid rising trend

New European Union rules may be needed to better protect consumers from crypto asset risks and stop diverging national regulations from creating unfair competition, the bloc's banking watchdog said on Wednesday. Regulators have warned investors since 2013 they could lose their shirts by investing in virtual currencies like Bitcoin and ether, or in initial coin offerings (ICOs) that raise money for companies in return for tokens. The value of bitcoin rocketed close to $20,000 in late 2017, sweeping up investors from across the world, but it has since lost three-quarters of its value.

The value of crypto assets globally peaked at $830 billion a year ago, but fell to $210 billion by October, equivalent to less than 3 per cent of the gold market. The European Banking Authority (EBA) said in a report on crypto assets that they typically fall outside the scope of EU financial rules, making it harder to build a detailed picture. EU regulators have identified financial institutions owning crypto assets directly, making a market in them, lending against crypto asset collateral, and exchanging crypto assets for cash, but have little data on these activities.

Market developments also point to the need for a further review of EU anti-money laundering legislation, the EBA said. A comprehensive cost-benefit analysis would determine what, if any, action is required to regulate "opportunities and risks" from crypto asset activities and related technologies, EBA said. The watchdog said a broad approach should be taken, including how high amounts of energy used to mint crypto assets impact EU climate change and sustainable development goals.

An EU analysis could assess the impact of crypto asset activities on financial sector resilience, and the links between crypto assets and traditional banking. "Given the pace and complexity of change, it would be desirable for a technologically neutral and future-proof approach to be adopted in developing any proposals should it be concluded that EU-level action is needed," EBA said.

The report marks a step closer to regulating the sector in Europe after attempts to find global consensus for rules have failed so far to go beyond monitoring the industry more closely. EBA said that in the meantime it will develop a common "monitoring template" that national regulators can require firms to complete in order to obtain better data.

EBA will also study each business model that involves crypto assets to see if they should be complying with any EU rules. Regulators already have a range of "robust supervisory powers" to mitigate risks, it said. They should take a conservative approach in forcing financial firms to hold capital to cover risks until there is a clear set of accounting rules to help value crypto assets, EBA said. Despite the crash in value putting off some investors, French "Tabac" shops are now selling bitcoins alongside cigarettes and lottery tickets.

(With inputs from agencies.)