The European Union’s insurance regulator proposes sweeping rule on cryptocurrency holdings
The European Union’s insurance regulator has proposed a sweeping rule requiring insurance companies to hold capital equivalent to the full value of their cryptocurrency holdings. This measure aims to reduce risks for policyholders.
Outlined in a March 27 Technical Advice report to the European Commission, the European Insurance and Occupational Pensions Authority (EIOPA) proposal imposes significantly stricter requirements than those for other asset classes like stocks and real estate, which are not even required to be half-baked.
“EIOPA considers a 100% reduction in the standard formula prudent and appropriate for these assets in view of their inherent risks and high volatility,” it said in a separate statement.
EIOPA said that this rule would fill a regulatory gap between the Capital Requirements Regulation and the Markets in Crypto-Assets Regulation (MiCA), noting that the European Union’s regulatory framework for insurers currently lacks specific provisions on crypto assets.
EIOPA pushes for stricter capital rules to address crypto volatility
The European Union financial regulatory agency provided four options for the commission to consider when applying capital requirements to crypto assets. The first option was simply to keep the existing rules as they were.
The second proposed placing an 80% “stress level” on crypto assets, while the third proposed a stricter 100% stress level. These levels of stress dictate how much capital insurance companies need to hold to remain solvent.
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The fourth option called for moving the Commission towards a holistic approach that would “assess the risks of tokenized assets as a whole.”
According to EIOPA, option three is the most appropriate option. “An 80% stress to the value of crypto-asset exposures does not appear sufficiently prudent,” whereas “a 100% stress is more appropriate and aligns with one of the approaches to the transitional treatment of crypto-assets under CRR,” EIOPA said.
Stricter capital rules will impact crypto investments
A 100% stress level assumes that crypto asset prices could drop to zero and that diversification—spreading risk across different assets—would not mitigate this risk. EIOPA highlighted that Bitcoin and Ether have previously fallen by 82% and 91%, respectively.
Imposing a 100% capital charge on crypto assets would represent a far stricter approach than traditional asset classes. In comparison, stocks are subject to capital charges ranging between 39% and 49%, while real estate carries a 25% charge, as outlined in the Commission Delegated Regulation 2015/35.
The agency noted that a full value capital charge for crypto asset-related (re)insurance undertakings shouldn’t be “overly burdensome” and that policyholders would not face material costs.
“The capital requirements would fully capture the risk of crypto-asset with a positive impact on policyholder protection in case there are material exposures in the future.”
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EIOPA recognized that crypto-asset (re)insurance undertakings represent only 655 million euros, accounting for a mere 0.0068% of all insurance undertakings in Europe, deeming their overall impact negligible.
However, it emphasized that crypto assets carry significant risks, including the potential for total loss of value. This concern underpins EIOPA’s recommendation for the third option, which proposes a 100% stress level on crypto holdings.
Luxembourg and Sweden insurers face the biggest impact
The (re)insurance undertakings most affected are expected to be those in Luxembourg and Sweden, which represent 69% and 21% of all crypto asset-related exposures, respectively, according to a report quoted by EIOPA.
Countries with significant exposure elsewhere include Ireland (3.4%), Denmark (1.4%), and Liechtenstein (1.2%). EIOPA added that most of these exposures are held through investment vehicles, like exchange-traded funds (ETFs), and are primarily held by unit-linked policyholders.
Nevertheless, the agency believes that a wider uptake of crypto assets down the line will necessitate a different approach.
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