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EU banks will need to back crypto one-for-one with euros, will manage digital euro privacy

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(Kitco News) - Banks in the European Union will be required to treat crypto as one of the riskiest classes of holdings according to a leaked document that details the final set of proposed amendments to a package proposed in 2021 designed to bring E.U. bank capital rules in line with international norms.

According to a report from CoinDesk, the amendments package is set to be voted on by the EU Parliament's Committee on Economic and Monetary Affairs on Tuesday. The rule changes are designed to ensure that traditional institutions retain enough capital to sustain lending levels.

The text of the package asks the European Commission to propose a bill by June 2023 and says banks should apply a 1,250% risk weight to crypto exposures until the end of 2024. That is the maximum possible level of risk and means that banks must issue one euro of capital for each euro of crypto they hold.

“The existing prudential rules are not designed to adequately capture the risks inherent to cryptoassets,” says an explanatory text accompanying the proposed law. “This is even more urgent in light of the recent adverse developments in cryptoasset markets.”

The proposal also calls for a more detailed legal proposal by the end of 2024 that offers a “fine-grained analysis of the risks of different crypto assets, as well as liquidity requirements.” Banks should also disclose their crypto exposure and risk management policies, the proposal said.

The Basel Committee on Banking Supervision (BCBS), which helps develop international standards for banking regulation, previously placed an exposure limit of 1% on all unbacked cryptoassets such as Bitcoin and recommended that all cryptos be treated with caution. The new standards are set to be implemented by January 1, 2025.

EU lawmakers to determine the digital euro privacy policy

In other, the European Central Bank (ECB) has indicated that it will be the job of lawmakers, and not them, to decide how much personal information the ECB will have access to if it adopts a digital euro.

“When it comes to the central bank, we propose that we do not have access to personal data,” ECB executive board member Fabio Panetta said to the EU Parliament’s economic committee on Monday during a discussion about the digital euro. “It will be for you, as co-legislators, to decide on the balance between privacy and other important public policy objectives like anti-money laundering, countering terrorism financing, preventing tax evasion or guaranteeing sanctions compliance,” he added.

Instead of the ECB handling accounts for users, Panetta said intermediaries like private banks will be responsible for managing digital euro accounts.

Panetta also sought to address concerns that a digital euro could have limitations programmed into it that control how consumers are able to spend their money.

“But let me be clear: the digital euro would never be programmable money,’ Panetta said. “The ECB would not set any limitations on where, when or to whom people can pay with a digital euro. That would be tantamount to a voucher. And central banks issue money, not vouchers.”

Basel committee endorses global standards for banks' investment in cryptoassets

As part of the digital euro rollout, the Eurosystem is considering launching a new digital euro app that would include only basic payment functionalities performed by intermediaries. “The app would ensure that no matter where you travel in the euro area, the digital euro would always be recognized and you would be able to pay with it,” Panetta said.

Currently, the ECB and European Commission are analyzing a possible compensation model for the digital euro, reviewing all design options, and finalizing their prototyping work. The investigation phase is expected to end in the autumn, according to Panetta, at which point the ECB Governing Council will decide whether to move on to the realization phase of the project.

During the realization phase, the ECB will develop and test the technical solutions and business arrangements necessary to eventually provide and distribute a digital euro. “The possible decision by the Governing Council to issue a digital euro would be taken at a later stage and only after the Parliament and the Council of the EU have adopted the legislative act,” Panetta concluded.

The European Commission is expected to release the results of its prototyping exercise in the second quarter of 2023. This will initiate the legislative process where the European Parliament and Council will need to agree on a digital euro policy.

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