EU launches a new regulatory sandbox for DLT and warns banks to limit Bitcoin holdings
(Kitco News) The European Commission has announced the launch of a new regulatory sandbox designed to help facilitate the development and growth of innovative applications of distributed ledger technologies (DLT).
According to the EU’s executive arm, the European Blockchain Regulatory Sandbox “establishes a pan-European framework for regulatory dialogues to increase legal certainty for innovative blockchain solutions.” The sandbox will run from 2023 to 2026 and will support 20 projects annually, including public sector use cases on the European Blockchain Services Infrastructure.
The ultimate goal of the sandbox is “to facilitate the cross-border dialogue with and between regulators and supervisors on the one hand, and companies or public authorities on the other hand,” the announcement said.
The European Commission advised that in order to increase legal certainty in support of Europe’s goal of leading the way on digitalization, “there is a need for enhanced dialogue between regulators and innovators.” The sandbox addresses this need “by offering a trusted environment for regulators and providers of DLT technologies to engage.”
The new sandbox will also work in conjunction with other sandboxing frameworks, such as the EU Digital Finance Platform and the artificial intelligence sandboxes that were established under the AI Act, the Commission wrote. “This collaboration is of pivotal importance given the increasing convergence of innovative technologies in use cases often involving several industry sectors.”
Companies and public entities from all industry sectors that are close to launching or at an early stage of being operational are invited to apply to participate in the sandbox. The main requirement is that they utilize DLT in some form. Priority will be given to more mature use cases where legal and regulatory questions of broader relevance arise, the EU Commission said.
The first call for applications is now open and will remain so until April 14. The European Blockchain Regulatory Sandbox will operate for three years with three annual cohorts of 20 use cases each. Interested parties can access the dedicated web portal to learn more information and begin the application process.
EU Banks urged to apply caps on BTC holdings
In other news out of the EU, the European Central Bank (ECB) issued a supervision newsletter on Wednesday advising banks that they should start applying caps on Bitcoin (BTC) and other cryptocurrency holdings prior to the global norms set by the Basel Committee on Banking Supervision (BCBS) taking effect.
The BCBS first revealed its recommendations on crypto banking in December. The guidance includes placing an exposure limit of two percent on Group 2 asses – non-fungible tokens (NFTs), stablecoins and unbacked crypto assets that don’t meet classification conditions – and an exposure limit of 2.5% for Group 1 assets, which includes Bitcoin, tokenized traditional assets and cryptoassets with effective stabilization mechanisms.
The ECB noted that while cryptos have not yet made significant inroads into the banking infrastructure of the bloc, they should still be treated as risky and limits on their holding should be enforced.
“Given the rapid pace of market developments, it is important to remain vigilant to the build-up and emergence of new risks,” the ECB warned. “Banks should follow a cautious and gradual approach when opening up to these markets.”
The central bank went on to note that while “The BCBS standard is not yet legally binding pending its transposition in the European Union,” banks that wish to engage in this market “are expected to comply with the standard and take it into account in their business and capital planning.”
The BCBS has also recommended that unbacked digital assets like Bitcoin be assigned the highest possible risk weight of 1,250%, which is the maximum possible level of risk and means that banks must issue one euro of capital for each euro of crypto they hold.
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