ECB Issues Crypto Licensing Guidance for the Banking Sector

The European Central Bank (ECB) has issued a new statement on the licensing of crypto-asset activities, reinforcing the commitment of Europe’s legislators and supervisors to harmonize regulations across the continent. The ECB highlights that crypto-asset markets are “developing apace.” As the body in charge of banking authorizations and European banking supervision, it wants to ensure banks engage in the crypto space “safely and soundly.”  

The ECB argued that current national rules diverge significantly: “In Germany, certain crypto activities are subject to a banking license requirement and to date, several banks have requested to be authorized to conduct these licensed activities. It is in this context that the ECB is taking steps to harmonize the assessment of licensing requests.”

When assessing licensing requests related to crypto-asset activities and services, the ECB will pay “particular attention” to:

• Business models: How does the proposed activity match the overall activity and risk profile of the institution? 
• Internal governance: Do the institution’s policies and procedures adequately identify and assess risks unique to crypto-assets? 
• Fit and proper assessments: Do banks have the appropriate level of knowledge and experience for the crypto business they are entering? Are senior IT managers and risk officers in place to ensure appropriate safeguarding?  

In its statement, the ECB also spotlights particular risk types associated with crypto-assets. These include:

• Cryptographic key theft
• Compromising login credentials 
• Technology vulnerabilities associated with outsourcing to third-party providers
• The need for appropriate governance to account for a bank’s AML/CFT risk profile

The Basel Committee on Banking Supervision is conducting ongoing work on the prudential treatment of cryptoasset exposures, including whether there is a need for specific liquidity requirements. Firms can contribute to their second public consultation before September 30, 2022.

Tracing crypto-assets

The ECB’s intervention comes months after the European Parliament outlined legislation to ensure the traceability of crypto-assets, as part of a wider package of AML reforms including the Markets in Crypto-assets (MiCA) rules. Introduced in 2020, MiCA provides a robust legal framework for developing crypto-asset markets in the EU. It has been broadly welcomed across the industry due to its single license offer, as well as its ability to increase firms’ credibility, and promote adoption by conventional banks. The involvement of the ECB in crypto harmonization for banks reflects the salience of this benefit. 

Ownership, control, and liquidity in relation to crypto-assets are key emerging focus areas for regulators across Europe. In the UK, the Financial Conduct Authority (FCA) has issued new rules on the ownership of crypto-asset firms. From August 11, 2022, any person acquiring 25% or more control of an FCA registered crypto-asset firm must receive prior FCA approval. The regulator notes it is now a “criminal offense” to acquire ownership without prior approval.  

Next steps

With harmonized frameworks for crypto-assets not expected until 2023, in the meantime firms must navigate the arbitrage highlighted by the ECB. This means becoming familiar with rules introduced at the national level, alongside the growing volume of wider guidance issued by international supervisors.