EU Insurance Authority Proposes Strict Capital Requirements for Crypto Holdings
The European Insurance and Occupational Pensions Authority (EIOPA) has proposed a new rule that would require insurance companies to hold capital equal to the full value of their cryptocurrency holdings.
This measure is designed to reduce risks for policyholders in the event of significant market fluctuations. The proposal, outlined in a Technical Advice report to the European Commission on March 27, sets a far stricter standard for cryptocurrencies compared to traditional assets like stocks and real estate.
A More Conservative Approach to Crypto Assets
Under the proposed rule, cryptocurrencies would be subject to a 100% capital charge, meaning that insurance firms would need to reserve capital equal to the value of their crypto assets. This is a far more stringent approach than for stocks, which only require a capital reserve of between 39% and 49%, or real estate, which incurs a 25% capital charge according to existing solvency regulations.
EIOPA justified this proposal by highlighting the high volatility and inherent risks associated with cryptocurrencies. The regulator pointed out that cryptocurrencies like Bitcoin and Ethereum have experienced steep declines in value in the past, with Bitcoin dropping by 82% and Ethereum by 91%, further reinforcing the need for higher capital reserves to protect policyholders.
Four Options for Capital Requirements
EIOPA presented four different options for the European Commission to consider when determining capital requirements for crypto assets:
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No Changes: Maintain the existing capital requirements without modifications.
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80% Stress Level: Apply a capital requirement of 80% of the value of crypto assets.
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100% Stress Level: Apply a full 100% capital requirement to crypto assets.
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Holistic Approach: Evaluate the risks of tokenized assets as a whole, rather than focusing solely on individual crypto assets.
After reviewing these options, EIOPA recommended the 100% stress level, arguing that a lower threshold, such as 80%, would not provide sufficient protection against the risks posed by cryptocurrencies.
Impact on Policyholders and the Insurance Market
While the proposal introduces a stringent capital requirement for crypto-related insurance, EIOPA assured that it would not lead to material costs for policyholders. The agency emphasized that these capital requirements would be essential in protecting policyholders in the future, should insurance companies be exposed to significant losses from crypto assets. The 100% capital charge aims to mitigate the risks of total value loss from high-risk investments like cryptocurrencies, thereby ensuring a higher level of consumer protection.
EIOPA’s proposal marks a significant step in the EU’s effort to regulate the growing influence of cryptocurrencies within traditional financial sectors. As the insurance industry adapts to the evolving digital asset landscape, the implementation of such measures could shape the future of both the crypto and insurance markets in Europe.
Regulatory Gap and MiCA
The proposal aims to fill a regulatory gap between the EU’s Capital Requirements Regulation (CRR) and the Markets in Crypto-Assets Regulation (MiCA), which is still under development. Currently, the EU regulatory framework lacks specific provisions addressing the unique risks posed by crypto assets within the insurance industry. EIOPA noted that the crypto asset market is still relatively small, accounting for just 655 million euros, or 0.0068% of all undertakings in Europe. However, the high-risk nature of these assets warrants more robust safeguards, according to EIOPA.
Editorial Team
Reporter at Coindoo
