The European Central Bank (ECB) submitted an opinion to the Council of the European Union and the European Parliament on proposed regulations for crypto assets. Some key points:
The proposed regulation provides that a competent authority may refuse authorization to an issuer of asset-referenced tokens, inter alia, where the issuer’s business model may pose a serious threat to financial stability, monetary policy transmission or monetary sovereignty. In this respect, where an asset-reference arrangement is tantamount to a payment system or scheme, the assessment of the potential threat to the conduct of monetary policy, and to the smooth operation of payment systems, should fall within the exclusive competence of the ECB (or the national central bank of issue of the relevant Union currency).
In a scenario involving the widespread use of asset-referenced and e-money tokens, there could be an increase in demand for safe assets, with a possible impact on asset price formation, collateral valuation, money market functioning and the conduct of monetary policy. This may ultimately lead to collateral scarcity for open market operations. Moreover, a widespread use of asset-referenced tokens for payment purposes may challenge the role of euro payments, and even undermine the public provision of the unit-of-account function of money.
The power of the competent authority to refuse authorization where the business model of an issuer of asset-referenced tokens poses a serious threat to financial stability, monetary policy transmission or monetary sovereignty assumes that the competent authority is able to accurately foresee such risks at the stage of authorization, which may not be possible as the scale of the risks depends on the scale of the use of the token.
In this respect, the proposed regulation does not seem to provide an equivalent tool allowing the competent authority to react if an asset-referenced token becomes a threat to financial stability, monetary policy transmission or monetary sovereignty during its life. Therefore, the ECB suggests that the competent authorities should also be empowered to take any appropriate measures to ensure the proper conduct of monetary policy and the promotion of the smooth operation of payment systems, and should be required to act in accordance with the ECB’s and the relevant central banks’ opinions on these particular aspects. Additional mechanisms to incentivise issuers to limit the scale of issuance, including stress-testing requirements with possible capital add-ons, should be included in the proposed regulations.