EBA – Is Lack of Regulation in the EU Hindering Innovation?

The European Banking Association (EBA), an independent authority charged with ensuring effective and consistent regulation across European banking sectors and maintaining financial stability, as well as assessing risks and vulnerabilities, has taken an unusual stance on the use of blockchain in fintech development.

While being vaguely dismissive of cryptocurrencies in the abstract and distinctly wary when advising potential investors of the dangers of crypto investment, The EBA has stated that blockchain has the potential to increase payment speeds, reduce costs and improve product offerings.

Four Use-case scenarios have been posited for the use of DLT in the existing financial infrastructure;

• Currencies,
• Asset Registries,
• Application Stacks,
• Asset-Centric Technologies.

Although, the EBA maintains that DLT as a technology is still not mature enough to handle the first three. A common thread in the EU-wide authority publications is that cryptocurrencies, DLT (blockchain) and associated technologies “warrant close monitoring”.
Thus far, there is no definitive progression path for EU banks to develop product offerings based on the live environments. There have been vague references to regulatory sandboxes for testing innovative new products, but these are usually implemented by the individual countries, and as yet there are no EU-wide test environments. This is leading to a division in how each respective nation approaches the EBA guidelines on crypto assets and technology.

A recent and very relevant example of how this vague approach to guidance by the EBA is the case of BBVA, a Spanish Bank implementing corporate loans on the blockchain.

Back in 2014, the EBA released a warning for financial organisations to “stay away from digital currencies” until the industry is more regulated, in which they actively “discourage financial institutions from holding, trading or selling virtual currencies.” As yet there has not been an update to this stance, and this is causing a delay in testing and using blockchains in a live environment, especially those that require native tokens to function. Read more on Cryptocurrency regulation.

What this means for BBVA is that their innovative marriage of private and public blockchains (Hyperledger and Ethereum) has stalled due to lack of ‘gas’. Instead of celebrating a thriving new development, BBVA has been forced to link their private blockchain to an Ethereum Testnet, which simulates the live version but doesn’t move real value, the digital equivalent of writing on the sand before the tide comes in. The functionality is the same, but it isn’t the same as the immutability of the live system.

While the 2014 recommendation is not legally binding or a formal prohibition, it is up to the regulators (in the case of the BBVA example, the Bank of Spain) just how far they want to test the limits of their judgement against the guidelines of the EBA.
Clear regulation facilitates and allows for the development of new technologies because rules create an ‘envelope’ in which new ideas can be tested and moderated. Vagueness and loose allusions to ‘close scrutiny’ and ‘careful monitoring’ only create a murky picture, from which each member country has to try and extrapolate a general idea of what they are allowed to do.

The lack of a unifying regulation structure within the EU is perhaps only relevant in Europe where countries have sovereign autonomy in some areas but in others are subject to EU laws. The EBA, European Central Bank (ECB) and European Securities and Markets Authority (ESMA) need to make a concerted effort to embrace an over-reaching regulation on virtual currencies and their underlying technologies that allow for innovation to happen.

In some countries such as Malta and Switzerland, the regulatory wheel is moving far too slowly, and they are branching out into the realms of Cryptocurrency and Distributed Ledger Tech (DLT) without fear of later reprisals (you can’t penalise in retrospect when there was no regulation in place). However, at the current rate of countries implementing their own regulation boundaries, the EBA may find itself less than the authoritative voice it once was.