EU Proposes Strict Capital Requirements for Crypto Holdings in Insurance Sector

According to Cointelegraph, the European Insurance and Occupational Pensions Authority (EIOPA) has proposed a stringent regulation requiring insurance firms to maintain capital equivalent to their crypto holdings. This measure aims to mitigate risks for policyholders and sets a higher standard compared to other asset classes like stocks and real estate, which do not require full backing. EIOPA's Technical Advice report to the European Commission on March 27 suggests a 100% haircut in the standard formula for crypto assets, citing their inherent risks and high volatility. The proposal seeks to address a regulatory gap between the Capital Requirements Regulation and Markets in Crypto-Assets Regulation (MiCA), as the current EU framework for insurers lacks specific provisions for crypto assets. EIOPA presented four options for the European Commission's consideration: no changes, an 80% stress level, a 100% stress level, or a broader consideration of tokenized assets. EIOPA favors the third option, arguing that an 80% stress level is insufficiently prudent, while a 100% stress aligns with transitional treatment approaches under CRR. The 100% stress level assumes crypto asset prices could fall entirely, with diversification failing to mitigate this risk. EIOPA highlighted past declines in Bitcoin and Ether, which fell 82% and 91%, respectively. This approach contrasts with capital charges for stocks, ranging from 39% to 49%, and real estate, at 25%, as per the Commission Delegated Regulation 2015/35. EIOPA believes a 100% capital charge for crypto asset-related insurance undertakings would not be overly burdensome and would not impose material costs on policyholders. The capital requirements aim to fully capture crypto asset risks, positively impacting policyholder protection. Despite the immaterial share of crypto asset-related insurance undertakings, accounting for just 655 million euros or 0.0068% of all undertakings in Europe, EIOPA emphasizes the high-risk nature of crypto investments, which could result in total value loss. Luxembourg and Sweden are expected to be most affected by the proposed rule, with these countries accounting for 69% and 21% of all crypto asset-related exposures among insurance undertakings. Ireland, Denmark, and Liechtenstein also have notable exposures. Most of these undertakings are structured within funds, such as exchange-traded funds, and held on behalf of unit-linked policyholders. EIOPA acknowledges that broader crypto asset adoption may necessitate a more differentiated approach in the future.