The ECB asserts that it must make sure that cryptocurrency service providers run "safely and soundly

The European Central Bank (ECB) has emphasized that it is its duty to make sure that providers of crypto asset services operate "safely and soundly" within the EU.

The public regulation and supervision of the European financial system is "essential" for the licensing of credit institutions, but licensing should "not stifle competition, financial innovation, or technological progress," the regulator stated in a supervision newsletter. Cryptoasset markets are "developing apace."

In order to guarantee a "consistent approach and high standards" across nations when it comes to cryptocurrencies, the ECB claims it "works closely" with national supervisors.

The markets in crypto-assets (MiCA) proposals, which were recently approved by the EU Council, will change the lack of a unified regulatory framework governing digital assets and services in the EU.

For the first time, cryptoassets will be regulated under MiCA, which will apply to stablecoin and unbacked cryptoasset issuers. When the regulation was adopted, the Council stated that it would "protect investors and preserve financial stability" while permitting "innovation and fostering the attractiveness of the crypto-asset sector."

Globally, the Basel Committee on Banking Supervision is now keeping track of banks' exposure to cryptoassets and is anticipated to release specific regulations soon.

The ECB noted that "national frameworks governing crypto-assets diverge quite extensively." A banking license is required in Germany for some crypto-related activities, and several institutions have applied for permission to engage in such activities.

"It is in this context that the ECB is taking steps to harmonise the assessment of licensing requests," the regulator continued.

When evaluating licensing requests, the ECB stated that it gives the following factors "particular attention," including a firm's business model, internal governance, and fit and appropriate evaluations.

According to the newsletter, "of course, crypto-assets put the spotlight on certain types of risk, starting with operational and cyber risks, and the ECB is also working to assess these."

These include outsourcing contracts to third-party suppliers, risks associated with the usage of specialized technology, and compromise of login passwords and cryptographic key theft.

According to the ECB, processes need to "take account" of the institution's crypto-asset AML/CFT risk profile. Crypto-assets are also thought to be susceptible to risks related with internal governance arrangements for AML/CFT.

In order to evaluate these risks, the ECB claims to rely on input from national AML agencies and FIUs. The ECB has pledged to "strive towards greater consistency" in prudential assessments made by national regimes.

The organization also said that the Single Supervisory Mechanism (SSM) is working on the digital transformation of banks, including the role of cryptocurrency, which is anticipated by the end of 2022.

The ECB concluded, "this fast-developing activity will, in any event, remain an area of focus for European banking supervision in years to come."

By fLEXI tEAM