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Bitcoin and co.: how crypto-assets are regulated

The first Bitcoin block was mined in 2009. Since then, thousands of different crypto-assets have been created, and the cryptosystem and the technologies on which it is built continue to rapidly evolve. Compared with the mainstream financial system, the cryptosystem occupies a small, largely self-contained niche. Nevertheless, a series of scandals and crises have exposed the system as a source of potential risk – as was the case, for example, when the FTX trading platform collapsed in the autumn of 2022. In view of this, European and international regulatory bodies are continually monitoring crypto-assets and developments in the cryptosystem. The key factors determining what risks could emanate from the cryptosystem are the size of the system as well as its interconnectedness with the mainstream financial system. The latest issue of the Bundesbank’s Monthly Report informs readers about current aspects of regulation and challenges.

What are crypto-assets?

The concept of Bitcoin was made public in a November 2008 paper authored by the pseudonymous Satoshi Nakamoto, marking a critical juncture on the path to a new, digital form of money. Ever since the 1980s, if not before, computer specialists and idealists had been attempting to bring together the internet, cryptography and money. Their aim was to develop digital money that everyone could use anytime and anywhere, free from government control. Today, there are thousands of crypto-assets. The two largest, Bitcoin and Ether, account for just under 70% of market capitalisation. 

Crypto-assets are a digital representation of value or of a right that can be transferred or stored electronically using distributed ledger technology (DLT) or a similar technology. Characterised by its decentralised data storage, DLT is the technology on which blockchain is based. 

When regulating crypto-assets, authorities apply the principle of “regulate and contain”. According to this principle, the system itself should be regulated whilst, at the same time, potential contagion risks between the cryptosystem and the mainstream financial system should be contained. Regulation should also focus on the economic function of an activity, irrespective of the technological means used – in regulatory terms, a loan should always be treated as a loan, regardless of the channels through which it is granted. In addition, since the technology underlying the cryptosystem certainly presents an opportunity to make the financial system more efficient, regulation should not hinder innovation.

Crypto-asset regulation initiatives

One of the crypto-asset regulation initiatives presented in the report is the EU Markets in Crypto-Assets Regulation (MiCAR). MiCAR was published on 9 June and entered into force on 29 June 2023, taking effect in stages from mid-2024 onwards. According to the Monthly Report, the adoption of this comprehensive rulebook marks a major step forwards for the European Union in the regulation of crypto-assets. The regulation’s objective is to create a harmonised European legal framework for all crypto-assets that are not already covered by other existing EU regulations. It is aimed directly at cryptosystem participants, including issuers of crypto-assets and providers of crypto-asset services. In future, these participants will be required to comply with a number of rules designed to help protect investors and keep potential risks in check. These include, for example, corporate governance and capital requirements.

European supervisory authorities are currently drawing up measures such as regulatory technical standards and guidelines on the basis of MiCAR. These are intended to further specify and make applicable the provisions in MiCAR. 

Who is responsible for regulating crypto-assets?

In Germany, the Federal Financial Supervisory Authority (BaFin), in cooperation with the Bundesbank, supervises issuers of asset-referenced tokens – also commonly referred to as stablecoins – and e-money tokens as well as crypto-asset service providers. MiCAR stipulates, however, that supervisory responsibilities be fully transferred to the European Banking Authority (EBA) in the case of significant asset-referenced tokens and partially transferred in the case of significant e-money tokens. 

While MiCAR is aimed directly at cryptosystem participants, the Basel Committee on Banking Supervision (BCBS) looks at banks’ exposures in the cryptosystem. The BCBS has developed an internationally harmonised standard with which banks are expected to comply when they take on exposures to crypto-assets. For instance, the standard sets out requirements for the level of capital that banks must hold for these exposures. The requirements are based on the risk profile of different types of crypto-assets. The members of the BCBS have agreed to implement the new standard by 1 January 2025. In this context, corresponding discussions have also commenced in the European Union. The review of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) that is currently underway is intended to be used to initially introduce a transitional regime for the treatment of crypto-assets.

The Monthly Report article also outlines other regulatory initiatives, such as the Regulation on a pilot scheme for market infrastructures based on distributed ledger technology, which has been in force in the European Union since 23 March 2023.

Implementing regulation is crucial

As the authors of the Monthly Report article note, the regulatory initiatives outlined have made an important contribution to the regulation of the cryptosystem. They help to protect consumers and to maintain financial stability and the smooth operation of payment systems without hindering innovation. According to the authors, it is now important to implement the regulation that has been adopted to date consistently and swiftly. In Europe, this means transposing the Basel standard into European law. In Germany, the national legislative changes necessary for MiCAR should be adopted and the provisions set out in the regulation factored into supervisory activities.