The European Union’s insurance regulator, the European Insurance and Occupational Pensions Authority (EIOPA), has introduced a proposal that could have significant implications for the insurance industry.
In a March 27 Technical Advice report to the European Commission, EIOPA suggested that insurance companies be required to hold capital equivalent to the full value of their cryptocurrency holdings. This move aims to safeguard policyholders by mitigating the risks associated with the high volatility and unpredictability of crypto assets.
EIOPA’s Proposal for Enhanced Capital Reserves
EIOPA’s proposal seeks to impose stricter capital requirements for cryptocurrency holdings compared to other asset classes such as stocks and real estate. Notably, the proposed capital reserves for cryptocurrencies are far more stringent than those required for traditional assets, which are not subject to similar requirements. The regulator justified this proposal by emphasizing the inherent risks and extreme price fluctuations of cryptocurrencies.
In a statement, EIOPA explained, “We consider a 100% reduction in the standard formula prudent and appropriate for these assets in light of their volatility.” This reflects the regulator’s view that cryptocurrencies are significantly riskier compared to more traditional financial assets, necessitating higher capital buffers for insurance companies that hold such assets.
Filling a Regulatory Gap for Crypto Assets
This new rule aims to bridge the regulatory gap between the existing Capital Requirements Regulation (CRR) and the recently introduced Markets in Crypto-Assets Regulation (MiCA). According to EIOPA, the EU’s regulatory framework for insurers currently lacks clear provisions specifically addressing crypto assets, and this measure seeks to address that void. By introducing these stricter capital rules, the EU is looking to ensure that insurers are better prepared to handle the potential risks arising from crypto market volatility.
EIOPA’s Four Options for Capital Requirements
The report outlined four different options for how the European Commission could approach capital requirements for crypto assets:
Maintain Existing Rules: The first option proposes leaving the current regulations unchanged.
80% Stress Level: The second option suggests applying an 80% “stress level” to crypto assets, meaning insurers would need to hold capital equal to 80% of their crypto asset holdings to remain solvent.
100% Stress Level: The third option, which EIOPA advocates for, proposes a stricter 100% stress level. This would require insurers to hold capital equivalent to the full value of their cryptocurrency holdings.
Holistic Approach: The fourth option suggests a more comprehensive evaluation of the risks posed by tokenized assets, taking a broader approach to assess their overall impact.
EIOPA’s Stance on the Most Suitable Option
After evaluating the available options, EIOPA has recommended that the European Commission adopt the third option, the 100% stress level. The regulator explained that an 80% stress level would not be sufficiently cautious given the volatile nature of cryptocurrencies. EIOPA argued that the 100% capital requirement better aligns with existing regulatory frameworks, such as the CRR’s transitional treatment of crypto assets.
Editorial Team
Reporter at Coindoo
Source: https://coindoo.com/eu-insurance-regulator-proposes-stricter-capital-rules-for-cryptocurrency-holdings/