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BBVA Can't Hold Cryptocurrency – And That's a Problem

After becoming the first financial institution to combine public and private blockchains in a live transaction, Spanish multinational bank BBVA has hit something of a quandary.

Specifically, it’s unsure how to take its forward-thinking work … forward.

In the process of executing what was expected to be the third in a series of blockchain-based corporate loans, the bank had to work around a lack of legal and regulatory clarity over whether it could (or should) hold the cryptocurrency needed to power a transaction on ethereum.

In short, BBVA’s innovation is meant to act like a public notary service, combining private Hyperledger technology (used to negotiate the loan) with a public blockchain (in this case ethereum) in an effort to identify and store each loan agreement with auditability.

However, erring on the side of caution, BBVA chose to abide by European Banking Authority (EBA) recommendations and not use the native token of ethereum, ether, which also serves as a kind of fuel to update the ledger. Instead, the bank anchored the loans to an ethereum testnet, a blockchain which simulates the live version, but that doesn’t move real value.

No big deal, you might think, but this uncertainty is hindering the hard-won innovation work.

Alicia Pertusa, managing director of corporate and investment banking at BBVA, said that according to the EBA recommendations of 2014, European banks are discouraged from owning, buying or selling cryptocurrencies. She pointed out that the process BBVA used for the loans was exactly the same as it would have been on the live ethereum, the only difference is it would need the regulator’s approval before using the real ether.

While the Bank of Spain, the regulator in this case, would not go on the record, it’s clear regulators understand banks may need or want to have small amounts of crypto, not as an asset or an investment, but to validate transactions.

Regulators tend to point out that the EBA 2014 recommendation is not legally binding and thus is not a formal ban. Still, the compliance department of a given bank would have to judge whether this particular use of cryptocurrencies is advisable.

Pertusa told CoinDesk:

“We do think that regulators are evolving in the way they look at cryptocurrencies and in this case in particular we have talked with our regulators. They understand very well that the use of gas and ether in this kind of network is very different from the speculation of cryptocurrencies.”

Regulatory requirements

Still, the results are a rare, tangible example of how inconclusive guidance, combined with big-bank jitters about the possibility of plans going wrong, are having an impact on innovation.

Only in March of this year, EBA chief Andrea Enria said it would be more effective to prevent banks and other regulated financial institutions from holding cryptocurrencies, rather than regulating the tokens themselves.

In a statement to CoinDesk, the EBA said: “The EBA has issued several warnings to consumers regarding virtual assets and has discouraged financial institutions from gaining exposures to such assets in view of their high-risk nature. However, as a matter of EU banking law, there is no prohibition on financial institutions gaining direct or indirect exposures to such assets.”

None of this lessens the irony that BBVA is doing real corporate loans – €75 million to technology company Indra in April; followed by last month’s €325 million to oil and gas company Repsol; and last week €100 million to construction firm ACS – but is uncomfortable holding a few dollars worth of ether because of mixed signals from regulators.

In fact, BBVA’s corporate loans platform achieves a number of regulatory goals, such as making the pre-trade negotiation of the loan – which is normally done with a mix of phone calls and messages – a single, transparent and easily audited process. And the lessons learned from the tethered loans will be taken on into BBVA’s blockchain syndicated loans project, which will launch in the coming weeks.

As far as the public part is concerned, Pertusa acknowledged that while public blockchain notarization is a powerful tool for those who know how to use it (there is lots of appetite among the bank’s clients for this tech, she said) there still needs to be plenty of education elsewhere.

She told CoinDesk:

“We see this as the future of public notaries because at the end of the day it’s a public record of an agreement that’s been reached privately. But a lot still needs to happen in that direction in terms of regulation, admitting that this public blockchain has the same value as a public notary.”

A popular use case

Turns out public blockchains are a popular tool for anchoring data – that is, creating a timestamped proof that the data existed at a certain time –  in the world of enterprise ethereum.

Kaleido, the partnership between ethereum development studio Consensys and Amazon Web Services, found that enterprises wanted to anchor private blockchain applications on the public chain more than just about any other blockchain-as-a-service feature.

Indeed, a poll of Kaleido blockchain cloud users saw this use case come out on top with some 37 percent of votes.

The results mirror what we are hearing in our client and partner discussions around the world,” said Kaleido founder Sophia Lopez.

Asked what he thought of the uncertainty facing banks looking at public blockchains for this purpose, Steve Cerveny, CEO of Kaleido, said he was aware of the issue and is in discussion with customers about it, adding that a workaround is in the offing.  

“We are currently exploring how Kaleido’s pinning/tether feature as-a-service could alleviate this concern,” said Cerveny. “For example, they pay Kaleido in fiat for this optional feature and Kaleido handles all of the technical details including ether/gas.”

Speaking on behalf of the Enterprise Ethereum Alliance, Conor Svensson, blk.oi founder and EEA standards chair, said the conundrum demonstrates why financial organizations are far more comfortable working with private blockchain deployments.

He concluded:

“It’s where they can exert a much higher degree of control over the network and are not bound by the same regulatory concerns that apply whilst working with the public blockchains.”

BBVA image via Shutterstock

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Don’t Regulate Crypto, Regulate Financial Institutions, Says EU Banking Authority Chair

Andrea Enria, the chairperson of the European Banking Authority (EBA), said that it could be more efficient to prohibit banks and other financial institutions from holding and selling cryptocurrencies, than to directly regulate crypto, the Financial Times (FT) reported Friday, March 9.

Enria’s remarks follow the recent movement toward cryptocurrency regulation in Europe. Yesterday, March 8, the European Commission released its “Action Plan” designed to develop an EU-wide regulatory framework for fintech, including Blockchain. Last week, the Governor of the Bank of England commented that crypto should be regulated and not “banned outright.”

During a speech Friday in Copenhagen, Enria mentioned that he was not convinced that the lack of institutions backing cryptocurrencies is evidence that cryptocurrencies themselves should be regulated. He added that the EBA had come up with the idea for limiting regulated companies’ contact with crypto in 2014, FT reports.

Enria supports withholding the full force of regulatory measures from fintech firms, so long as they do not perform the same functions of banks, providing credit, debit, and liquidity.

“An excessive extension of the regulatory perimeter […] [for fintech firms] is likely to be a sub-optimal solution. It would risk excessively constraining financial innovation, as the compliance burden placed on banks is not sustainable for small innovative start-ups.”

However, Enria added that EU regulators should not permit “de facto banks” to offer a combination of “deposit-taking and lending” without rigorous regulatory supervision.

Enria noted that fintech regulation must take place across the European Union in order to keep EU firms competitive with the US and China.

In mid-February 2018, the European Supervisory Authorities, made up of the EBA, the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA), released a warning that cryptocurrencies were risky assets from which investors need to be protected.

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EU Regulators Caution Consumers Against ‘Highly Risky’ Crypto Investing, Again

The European Supervisory Authorities (ESAs) has warned customers that cryptocurrencies are “highly risky” assets that show “clear signs of a pricing bubble” in a pan-European Union consumer warning released Monday, Feb. 12.

The ESAs is made up of the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA).

The high risk associated with investing in cryptocurrency, according to the ESAs, means that investors can “lose a large amount, or even all, of the money invested:”

“The ESAs warn consumers that VCs (virtual currencies) are highly risky and unregulated products and are unsuitable as investment, savings or retirement planning products.”

The warning, published on the ESMA website, comes with an introduction that explains the fear that too many people are investing in crypto without fully understanding the risks.

The official warning also brings up the idea that unregulated exchanges are unprotected because of their existence outside of global financial regulations, meaning a customer’s losses from an event like a cyberattack would not be covered by EU law.

The ESAs’s warning ends with advice for investors to protect themselves:

“You should not invest money you cannot afford to lose.”

ESMA had previously warned customers in Nov. 2017 about Initial Coin Offerings (ICOs), citing the same reasons of a lack of investor understanding and the problems with unregulated financial activities.

The ESAs’s most recent warning today comes after the European Central Bank (ECB) told CNBC on Feb. 7 that crypto regulation is “not high on the to-do list.” Conversely, on Feb. 8, an ECB Executive Board member referred to cryptocurrency a “contagion” and “contamination” and called for preemptive regulation.

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3 EU Watchdogs Warn Over 'High Risks' of Crypto Investment

Three European regulators with oversight over securities, banking and pensions issued a combined warning today to EU residents considering investing in cryptocurrencies.

Citing the crypto markets’ volatility, lack of regulation and the potential for severe losses, the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) wrote a brief note warning investors of the “high risks of buying and/or holding so-called virtual currencies.”

Collectively referred to as the European Supervisory Authorities (ESAs), the regulators state there is a “high risk” that investors will lose all of their funds if they choose to invest in cryptocurrencies, specifically noting that there is an apparent bubble in the markets currently.

They continued, writing:

“VCs [virtual currencies] and exchanges where consumers can trade are not regulated under EU law, which means that consumers buying VCs do not benefit from any protection associated with regulated financial services. For example, if a VC exchange goes out of business or consumers have their money stolen because their VC account is subject to a cyber-attack; there is no EU law that would cover their losses.”

The warning explicitly mentions bitcoin, ethereum, litecoin and XRP, while further noting that other cryptocurrencies are often sold without any information explaining their background or the risks in purchasing them.

Part of the risk, the ESAs claim, arises from difficulty purchasing or selling cryptocurrencies due to transaction delays. Users may purchase some amount of a cryptocurrency at a specific price, but network congestion means they could receive a smaller amount at a higher price, they say.

For residents who still want to invest in cryptocurrencies, the note recommends understanding the characteristics of the token being sold and not investing more than they can afford to lose. In addition, users should take steps to keep their digital wallets secure.

The warning comes amid increasing noise within the EU over the crypto market, its perceived risks and potential regulation.

The ESMA said last week that cryptocurrencies will be one of its top priorities in 2018, while, a day later, senior officials from France and Germany called for the G20 group of nations to discuss cooperative action on cryptocurrencies ahead of a summit next month.

At the same time, European Central Bank (ECB) executive board member Yves Mersch aired concerns over the apparent “gold rush” in the crypto markets, adding that a regulatory solution may be to force unregulated exchanges to report transactions.

EU flag image via Shutterstock

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