EU launches new regulatory sandbox for DLT and warns banks to limit Bitcoin holdings

Editor’s Note: With so much market volatility, stay tuned for daily news! Get caught up in minutes with our quick summary of today’s must-read news and expert opinions. Sign up here!

(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 technology (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 cross-border dialogue with and between regulators and supervisors on the one hand, and companies or public authorities on the other,” the announcement said.

The European Commission advised that to increase legal certainty in support of Europe’s goal of leading the way in digitization, “there is a need for increased dialogue between regulators and innovators.” The sandbox addresses this need “by providing a trusted environment for regulators and providers of DLT technologies to engage.”

The new sandbox will also work together with other sandbox frameworks, such as the EU Digital Finance Platform and the artificial intelligence sandboxes established under the AI ​​Act, the commission wrote. “This collaboration is of central importance given the increasing convergence of innovative technologies in use cases that often involve multiple industry sectors.”

Companies and public enterprises from all industry sectors that are close to launch or in an early stage of being operational are invited to apply to participate in the sandbox. The main requirement is that they use DLT in one form or another. Priority will be given to more mature use cases where legal and regulatory issues of wider relevance arise, the European Commission said.

The first call for applications is now open and will remain open until 14 April. 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 online portal to learn more information and start the application process.

EU banks urged to cap BTC holdings

In other non-EU news, the European Central Bank (ECB) issued a supervisory newsletter on Wednesday advising banks that they should start capping Bitcoin (BTC) and other cryptocurrency holdings before global norms set by the Basel Committee on Banking Supervision (BCBS) kick in Power.

The BCBS first revealed its recommendations on crypto banking in December. The guidance includes setting a two percent exposure limit on Group 2 assets – non-fungible tokens (NFTs), stablecoins and unbacked cryptoassets that do not meet classification conditions – and a 2.5% exposure limit on Group 1 assets, which include Bitcoin, tokenized traditional assets and crypto-assets with effective stabilization mechanisms.

The ECB noted that while cryptos have yet to make significant inroads into the banking infrastructure of the bloc, they should still be treated as risky and limits on their holdings should be enforced.

“Given the rapid pace of market development, it is important to be vigilant about the build-up and emergence of new risks,” the ECB warned. “Banks should take a cautious and gradual approach when opening up to these markets.”

The central bank went on to note that although “the BCBS standard is not yet legally binding pending EU transposition”, banks wishing to engage in this market are expected to comply with the standard and take it into account in their business and capital planning .”

BCBS has also recommended that unbacked digital assets such as Bitcoin be assigned the highest possible risk weight of 1250%, which is the maximum possible level of risk and means that banks must issue one euro of capital for every euro of crypto they hold.