Solvency II is best place to deal with prudential risks of crypto assets for time being, EIOPA says

The European Unionʼs Solvency II regime is the best place to deal with prudential risks of crypto assets for the time being, according to technical advice from the European Insurance and Occupational Pensions Authority (EIOPA) published on March 27.

The European regulator proposed amendments to Solvency II, applying one-to-one capital requirements for investments in crypto assets rather than using the Markets in Crypto-Assets Regulation (MiCA), due to the latter still “being in the early stages”, having come into force at the end of 2024.

The European Commission is looking to standardise the classification of crypto assets among insurers and reinsurers, which so far has lacked specific provisions. This lack of clarity exposes the EU to crypto-based risks, such as extreme price movements, market manipulation and low liquidity.

As part of this process, the commission issued a call for advice to EIOPA on April 30, 2024, and the pan-European watchdog subsequently held a public consultation to assist in formulating its advice. The commission is expected to consider EIOPA’s recommendations by June 30.

Meanwhile, the UK Prudential Regulation Authority (PRA) currently has no plans to amend the Solvency UK regime. It will consider mitigating the “equivalent risks” through other crypto regulations, a spokesperson said.

In March 2022, the Bank of England (BoE) called for evidence on crypto assets and decentralised finance, while the PRA also launched a data collection on PRA-supervised firmsʼ crypto assets in December 2024. The spokesperson said it was too early to comment on what its policy for the prudential treatment of crypto might look like as the collection exercise had only just closed.

In the EU, although MiCA includes transitional prudential measures for stressing tokenised assets, EIOPA said that because this regime was still in its infancy the Solvency II regime was better placed to manage any risks from insurersʼ and reinsurersʼ use of crypto assets.

Following a cost-benefit analysis, EIOPA is proposing to introduce a 100% blanket capital requirement for EU insurers’ crypto asset holdings, regardless of their balance sheet recording or exposure level. This policy would result in a one-to-one stress on the crypto asset value without diversification effects.

However, EIOPA also advised that only investment-type crypto assets (with profit rights attached) should be considered when imposing the capital requirements, since crypto assets that serve purely as a payment method are expected to mitigate risks through currency conversions.

At present, crypto assets do not have a specific standard formula under Solvency II, which results in them being categorised as either “intangible assets” or “equity risk Type 2” in practice.

EIOPAʼs preferred policy option would require amendments to Articles 203 and 87 of Solvency II to allow for investments in crypto assets, applying the specific 100% stress with no diversification, as well as an alteration to Article 168(3) to explicitly exclude exposure to crypto assets from Type 2 equity.

Industry responses

Trade body Insurance Europe published a response in late December to EIOPA’s public consultation, supporting the option to stress the value at 100%, but proposing an implementation of diversification as “the most technically accurate approach”.

“Rather than introducing a specific stress calculation, a zero-balance sheet valuation for crypto assets could be applied, setting the market value of these assets to zero. As such, investing in crypto assets will lead to a 100% loss of the own funds, aligning with the outcome of a 100% stress in Solvency Capital Requirement without the need for diversification adjustments,” Insurance Europe said in its response.

In its January response to EIOPA on the consultation, US-based crypto exchange Coinbase advocated leaving any prudential treatment of crypto to the MiCA regime supporting a “look-through” approach into e-money tokens (EMTs), which assesses the underlying structure of the assets. The firm said MiCA-regulated EMTs should act as a reliable store of value and be treated similarly to money market funds, as they focus on liquidity, stability and low-risk investments.

“We believe that the proposal requiring that all crypto asset exposures, including EMTs, be stressed at 100% without diversification is disproportionate to the risks and negates the establishment of a MiCA framework for EMTs,” said Coinbase.

Solvency II operates a look-through approach for collective investment funds.