In remarks that were prepared for a March 9 seminar on FinTech at the Copenhagen Business School, European Banking Authority (EBA) Chairperson Andrea Enria warned that overly-stringent regulations on the cryptocurrency space could stifle innovation.
Enria's speech, entitled "Designing a Regulatory and Supervisory Roadmap for FinTech," raised the question of whether authorities should extend the "regulatory and supervisory requirements [by which banks must abide] to new FinTech players." The EBA chair, whose organization is tasked with providing "a single set of harmonised prudential rules for financial institutions throughout the EU," urged caution on this front.
Taking the example of virtual currencies, he explained that several central banks have argued that the instruments "cannot fulfil the traditional functions of money" because the volatility of their market prices makes them a poor choice for a "unit of account, means of exchange and reserve of value." Unlike some public officials, though, Enria has "yet to be convinced that this is a sufficiently strong argument to attract crypto-currencies under the full scope of regulation."
In 2014, his speech relates, the EBA recommended that European authorities address cryptocurrencies with a three-point strategy and hold off on passing any kind of regulatory framework until the technology is more mature.
The authority's proposal consists of:
"(i) full application of customer due diligence obligations under the anti-money laundering and counter terrorist financing (AML/CFT) regulations – a point that has now been included under the revised Anti-Money Laundering Directive (AMLD5);
(ii) warnings to consumers that investments in these assets are not protected by any regulation and, therefore, by any safety net, so that they may lose all the money invested – a step that has been accomplished through a recent warning we issued jointly with ESMA and EIOPA; and
(iii) preventing regulated financial institutions from buying, holding or selling these products – and possibly also from establishing direct or indirect connections with managers of crypto-currencies –, so as to segregate the two sets of players and avoid contagion."
That strategy stops short of requiring financial authorities to step into a field that is "still very heterogeneous, changing fast and, as such, difficult to regulate and supervise." By leaving the cryptocurrency space unregulated, officials would also minimize the risk of making the firms operating within it appear more credible than they really are and of suggesting to would-be investors that they are protected in any way.
In a nutshell, Enria's contention is that:
"An excessive extension of the regulatory perimeter, attracting most FinTech firms under the scope of bank-like supervision just because they compete with banks in some market segment, is likely to be a sub-optimal solution. It would risk excessively constraining financial innovation, as the compliance burden placed on banks is not sustainable for small innovative start-ups."