EU Banking Authority: Excessive Crypto Regulation Will Constrain Innovation

The Chairman of the European Banking Authority Andrea Enria expressed  his opinion against excessive regulation of cryptocurrency, warning it  might constrain financial innovation, News Bitcoin reported.

Outlining EBA’s position in regards to the supervision of the Fintech  industry, Andrea Enria stated that regulators need to maintain a  “measured approach”.

Speaking at the Copenhagen Business School on Friday, Enria stated that  he was not convinced cryptocurrencies should fall under the regulations  that apply to traditional financial systems. Several central banks have  argued that cryptocurrencies lack the institutional backup and cannot  fulfill the functions of money – unit of account, means of exchange and  reserve of value, Enria said. 

Enria further admitted that crypto valuations seem to confirm this view. 

 “Still, I am yet to be convinced that this is sufficiently strong  argument to attract cryptocurrencies under the full scope of  regulation”, Enria said. 

The official pointed out that cryptocurrencies can be used for  international payments, thanks to an innovative mechanism – the  distributed ledger technology. 

Enria remarked that the policy debate on technological and financial  innovation often focuses on two opposite approaches: “regulate and  restrict” – banning innovative business not fitting into the rulebook;  and “let things happen.”

In Enria’s opinion, both of the regulatory strategies have shown  limitations, with the first being ineffective in open markets, and the  second one increasing risks in the unregulated sector. EBA’s chief  official believes that a realistic approach involves the implementation  of specific regulations in accordance with the different risks for the  firms, their customers, the financial sector, and the whole economy. 

Enria further expresses that certain functions provided in the  cryptocurrency space, such as providing liquidity in crisis situations  and lending (BANCOR), should be strictly reserved for the banks and  subject to “enhanced regulation and supervision”. 

At the same time, he argues that services, like payments and issuance of  electronic money, may be provided by other go-betweens. These services  are not intrinsically related to the essential functions of banks, the  head of Europe’s banking authority argued. 

Enria also admitted crypto sector is changing fast and it’s difficult to  regulate and supervise. Authorities have to continuously review  regulations, but they also need to maintain an informed and measured  approach, he added. 

Enria warned that small businesses startups using the new innovation cannot sustain the compliance burden placed on banks: 

 “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”. 

However, EBA’s Chairman is convinced that such move would create the  risk of “constraining financial innovation” advocating for a  “proportionate” and “less intense” approach in comparison to regulations  applied to the banks, citing “lower potential for systemic risk” from  the crypto sector. 

Despite this Enria stated that regulators should never allow de facto  banks to combine deposit-taking and lending outside strict regulatory  requirements and effective supervision. Any financial firm doing that  should be regulated and supervised as a bank, he expressed.

Although Enria feels that the first step for regulators should be to  understand how new products and business practices fit in the existing  regulatory framework. The conscious choice not to impose the full set of  rules on a nascent technology can lead to a more mature and productive  dialogue between innovative firms and regulators, he added. 

According to EBA’s executive, the debate on how to regulate innovation  is often “laden with prejudices and undue simplifications”. In his view,  a “proportionate, technologically neutral approach” to regulation  should be pursued while avoiding “inherent bias towards the status quo”. 

“Fintech firms must be able to scale up and offer services across the  Single Market, providing benefits to all EU citizens”, Enria said. He  also noted that competition in the Fintech space is developing globally  and warned European businesses would have to cope with significant  disadvantages if local authorities impose different sets of rules.  Current variations may result in “regulatory arbitrage” or consumer  protection risks. 

Meanwhile in the U.S. Congress itself eyes federal cryptocurrency oversight with  a meeting expected later this month by global financial regulators at  the G20 conference to discuss cryptocurrency regulation worldwide, News  Bitcoin reported. 

The G20 includes central bankers and leaders from 19 countries and the  European Union, spanning the entire globe: Argentina, Australia, Brazil,  Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico,  Russian Federation, Saudi Arabia, South Africa, South Korea, Turkey,  United Kingdom, and the United States. 

Bitcoin is currently trading at [FIAT: $9,232.57]  down -2.40% at the time of this report according to Coin Market Cap. 

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