The chairperson of the European Banking Authority (EBA) has said that he is yet to be convinced that cryptocurrencies should be brought under full scope of regulation.

Speaking at an event last week on “Designing a Regulatory and Supervisory Roadmap for FinTech,” Andrea Enria said:

“Recently, several central banks have argued that crypto-currencies lack the institutional back up of a central bank and cannot fulfil the traditional functions of money … The very large fluctuations in the valuations recently experienced by most cryptocurrencies seem to confirm this view. Still, I am yet to be convinced that this is a sufficiently strong argument to attract crypto-currencies under the full scope of regulation.”

He pointed out that the EBA, in its 2014 opinion, prepared a possible regulatory framework for cryptocurrencies. The opinion, he said, underscored the need for a more nuanced strategy built around three pillars:

• Full application of customer due diligence obligations under the AML/CFT regulations – which has now been included under the revised Anti-Money Laundering Directive (AMLD5);
• 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;
• Preventing regulated financial institutions from buying, holding or selling these products – and possibly also from establishing direct or indirect connections with managers of cryptocurrencies.

“This strategy would avoid granting any official recognition to a sector that is still very heterogeneous, changing fast and, as such, difficult to regulate and supervise. It would also convey a clear and credible message to users and investors, that there is no form of public protection to investment in these often highly speculative assets,” he said. “Regulators need to continuously review the boundaries and consider including new players under their remit. But they need to maintain an informed and measured approach.”

Furthermore, Enria believes that excessive fintech regulation is likely to be a sub-optimal solution as it would constrain financial innovation.

“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,” Enria said. “Importantly, it would also risk lending credibility via regulation to firms that do not deserve it, legitimizing activities that could carry high risk and generating an expectation of public protection in case something goes wrong.”