In a cryptocurrency-related move, the European Banking Authority (EBA), in collaboration with the European Systemic Risk Board (ESRB) and the Financial Stability Board (FSB), announced a joint plan to examine the interconnectedness of traditional banks and non-banks. Financial institutions (NBFIs).
Shining a light on shadow banking
As EBA President José Manuel Campa revealed in an interview with the Financial Times, the move sheds light on the potential risks and contagion effects that could arise between banking and non-banking financial sectors in a “stress scenario”. aims to do so.
The EBA’s approach is an important step in understanding banks’ exposure to the cryptocurrency sector, including hedge funds, cryptocurrency platforms and private equity funds.
The EBA’s investigation will include assessing banks’ balance sheet exposure to non-banks and examining the murky waters of NBFIs, which Campa called a “murky sector” characterized by varying and often “inhomogeneous” data quality.
The plan comes at a time when the total value of assets owned by NBFIs is estimated to be more than $200 trillion, according to FSB data.
EU’s Cryptocurrency Position: Balanced Legislation?
The European Union’s approach to cryptocurrency regulation is cautiously neutral, and the investigation forms part of its broader regulatory framework. Although comprehensive Markets for Cryptocurrency Assets (MiCA) regulations are not expected to be fully implemented until 2026, the EU has not hesitated in its regulatory efforts.
This includes investigating banks’ digital currency exposure and taking strict action against unverified cryptocurrency users. Last July, the European Parliament introduced significant limits, limiting transactions for unverified cryptocurrency users to 1,000 euros and cash payments for the same category to 7,000 euros.
These measures were part of a larger plan to revise anti-money laundering (AML) rules across the EU. Damien Carême, a French lawmaker leading AML negotiations, emphasized that these laws are aimed at money laundering and do not specifically ban cryptocurrency transactions, noting:
We absolutely do not ban cryptocurrency trading. This is a case where identification is impossible.
At the same time, the EBA is actively preparing for the adoption of the MiCA Regulations. In the same month, authorities advised stablecoin issuers to prepare for MiCA compliance to avoid sudden business adjustments in the future.
EBA’s principles require full disclosure of the rights and risks associated with token ownership, fair treatment of all holders, and strong retention, recovery and redemption agreements.
The Association of Financial Markets in Europe (AFME), Europe’s leading trade body, strongly recommends the integration of Decentralized Finance (DeFi) within the MiCA regulatory framework.
AFME highlights that overlooking DeFi could lead to regulatory arbitrage and undermine the intended effectiveness of future regulatory measures.
Featured image by Unsplash, chart by TradingView