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European insurers will be penalised for holding cryptocurrencies under proposals announced by EU regulators on Thursday, imposing their most stringent capital requirements ever on bitcoin and other digital assets.
The move is designed to discourage EU insurers from holding digital assets, at a time when the US has begun to loosen its restrictions on such holdings by traditional financial institutions.
The European Insurance and Occupational Pensions Authority said it was recommending the European Commission introduce a 100 per cent capital requirement for all crypto assets held by insurers.
The watchdog’s punitive capital proposals would also apply to stablecoins pegged to fiat currencies and other tokens backed by traditional assets such as debt or equities.
This is a tougher approach than currently taken by many EU insurers, which Eiopa said currently allocate capital equal to between 60 and 80 per cent of the value of crypto assets.
It is the first time Eiopa has introduced such heavy capital requirements for any assets held by insurers. It is also one of the first regulators to offer specific proposals for how insurers should treat crypto assets.
However, the proposals are unlikely to have much impact soon given the relatively small amount of crypto held by European insurers.
EU insurers held €655mn of crypto assets at the end of 2023, according to Eiopa, which is less than 0.01 per cent of their €9.6tn of overall assets. About two-thirds of their crypto holdings were in Luxembourg, indicating they are mostly held indirectly via funds.
Justifying its tough approach, the regulator said crypto assets were associated with a number of risks, including “extreme price movements, market manipulation, lack of price transparency and low liquidity”. It noted that the largest observed annual loss of bitcoin in the past 14 years was a drop of 82 per cent in 2010-11 and Ethereum fell 91 per cent in 2017.
The EU’s capital requirements regulation currently allows insurers to apply a “look-through” approach to stablecoins and other tokenised assets — meaning insurers treat them as if they were the underlying currency or security.
Eiopa said it decided against this because “there is insufficient evidence to ensure that this approach is prudent”, adding that “the differentiated treatment would introduce unnecessary complexity in the regulation”.
Global regulators have opted for a more nuanced approach for bank capital requirements on crypto.
The Basel Committee on Banking Supervision proposed splitting crypto assets into two groups. The first includes stablecoins and other tokenised assets that will have the capital requirements of their underlying currency or security; the second group of riskier assets require banks to back them with 100 per cent of capital.
Since US President Donald Trump’s election last November, he has promised to make America “the bitcoin superpower of the world” and end a regulatory crackdown on the sector.
In January, the US Securities and Exchange Commission removed guidance that companies safeguarding crypto assets should include them as liabilities on their balance sheets — a move widely seen as making it easier to handle digital assets.
The SEC has also dropped lawsuits against crypto exchanges, including one against Coinbase for violating US securities law that it abandoned in February.
