EU Regulator Advocates for Entire Cryptocurrency Reserving to Be Held in Capital Reserves
In a bold move, the European Insurance and Occupational Pensions Authority (EIOPA) has called for tougher rules on how insurers invest in crypto. The regulatory body has urged the European Commission to enforce a 100% capital requirement for digital assets held by insurance firms.
Under EIOPA's recommendation, insurance companies would be compelled to fully back their crypto holdings with capital, ignoring any classification of these assets on their balance sheets. The new rules would cover both direct and indirect exposure to digital currencies.
In its technical advice report, EIOPA highlighted the dangers of investing in crypto. It pinpointed extreme price volatility, market manipulation, low liquidity, and a lack of price transparency as significant risks. EIOPA deems a 100% capital requirement the prudent way to manage these risks.
As EIOPA stated, "We recommend that a one-to-one capital requirement be applied consistently to all crypto holdings of EU (re)insurers."
Currently, crypto investments by European insurers are minimal. The report shows that insurers in the EU had invested only €655 million ($708.68 million) in digital assets by the end of 2023. That equates to just 0.0068% of the sector's total assets, amounting to €9.6 trillion ($10.39 trillion).
EIOPA acknowledged, "Overall, the investments of undertakings in crypto-assets are immaterial."
If the European Commission adopts EIOPA's proposal, insurance companies will need to boost their reserves to cover the full value of their digital assets, which could significantly impact their capital ratios. Under the current system, EU insurers allocate capital equivalent to 60% to 80% of their crypto holdings.
For now, the crypto market remains largely untapped by European insurers, with sustained caution expected due to price volatility and security risks. This stance may change if EIOPA's proposal is adopted, leading to a more cautious approach from insurers towards digital assets.
EIOPA's move prioritizes policyholder protection by ensuring insurers hold liquid, stable assets, neutralizing crypto's inherent risks and preventing sudden market crashes from destabilizing payouts. The European Commission will review EIOPA's advice for potential updates to Solvency II, with global regulatory alignment and technological shifts remaining potential developments.
- The new rules proposed by EIOPA would require insurance companies in Europe to back their crypto holdings completely with capital, disregarding any categorization on their balance sheets.
- EIOPA has identified extreme price volatility, market manipulation, low liquidity, and insufficient price transparency as notable risks associated with investing in crypto.
- If the European Commission adopts EIOPA's proposal, insurance companies in the EU would need to enhance their reserves to cover the full value of their digital assets, potentially impacting their capital ratios.
- EIOPA's recommendation prioritizes policyholder protection by ensuring insurers hold liquid, stable assets, thereby mitigating the risks inherent in crypto investments and preventing sudden market crashes from destabilizing payouts.
