L’European Insurance and Occupational Pensions Authority (Eiopa) has launched a public consultation on its draft technical advice on capital requirements for cryptocurrencies within the EU regulatory framework for insurers. In response to the European Commission’s request for advice, the Authority analyzed the cryptocurrency holdings of EU insurers and the risk inherent in these holdings.
In light of the results of this analysis, the Authority proposes a 100% haircut for insurers’ cryptocurrencies regardless of their balance sheet treatment and investment structure. As the cryptocurrency market is still in its early and evolving stages, EIOPA recommends reviewing the prudential treatment of these assets in the future to determine whether differentiated treatment would be appropriate.
Cryptocurrencies are a relatively new asset class in finance and their regulatory treatment is still evolving. While the Capital Requirements Regulation (CRR) with its recent amendments and the Cryptocurrency Markets Regulation (MiCAR) include transitional prudential measures for cryptocurrencies, the EU regulatory framework for insurers does not provide specific provisions on cryptocurrencies. As a result, insurance companies currently classify their cryptocurrencies without a consistent approach, and there are concerns about the risk sensitivity of these practices and the level of prudence associated with them.
Exposure and risks of cryptocurrencies
“European insurers’ investments in crypto-assets are currently irrelevant – wrote the Authority in the document announcing the consultation – with approximately 655 million euros or 0.0068% of their total investments of 9.632 trillion euros allocated to these assets. Reporting data shows that insurers’ crypto-asset investments are typically structured within funds and held on behalf of unit-linked policyholders. However, the lack of transparency, low liquidity and extreme price volatility of cryptocurrencies, combined with the potential for broader future adoption and possible losses to policyholders, require careful regulatory and supervisory assessments.”
Historical data for two of the largest cryptocurrencies suggests that current possible Solvency II capital requirements for cryptocurrency holdings actually underestimate the risks associated with cryptocurrencies. To promote a harmonized, prudent and proportionate treatment of cryptocurrencies, Eiopa therefore proposes to introduce 100% stress on cryptocurrencies without diversification, regardless of their balance sheet treatment and regardless of whether the exposures are direct or indirect.
Furthermore, according to the Authority, such an approach would adequately reflect the high risk of these investments and would not introduce unnecessary complexity or reporting obligations into the regulation. Finally, Eiopa’s opinion recognizes that for some cryptocurrencies, such as asset-related tokens and e-money tokens authorized under MiCAR, differentiated treatment may be appropriate and suggests a review of the treatment in the future.
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