RegCORE – Client Alert | EU Digital Single Market
QuickTake
The European Central Bank (ECB) frequently provides legal opinions either on its own initiative or at the request of EU institutions or national authorities with respect to proposed new laws that could have an impact on the ECB's tasks or those of the Eurosystem. On 27 May 2024, the ECB issued its Opinion on crypto-asset service providers (CASPs) ability to hold accounts at a central bank (the Opinion).1 With little over a month after the ECB had received a request from the Latvian Finance Ministry for an opinion on a national draft law on crypto-asset services (the Draft Law), the ECB did not hesitate in providing its Opinion on what the national Draft Law had purported to pass into Latvian law, by clearly communicating to decline support for CASPs being able to hold accounts directly with a central bank, at least for the time being. The Opinion however does leave the door open by signalling that the ECB and the Eurosystem expect to announce a harmonised approach to how non-bank payment service providers (and potentially some eligible CASPs) may access central bank operating payment systems and safeguarding accounts. Further analysis on that proposal will follow after its publication.
As explored in this Client Alert, Latvia's Draft Law upon which the ECB was asked to opine, was developed under the framework of the EU's Markets in Crypto-Asset Regulation (MiCAR). The Draft Law, sought to grant CASPs the right to open an account directly with the Latvian central bank (Latvijas Banka) for the purposes of safeguarding clients' funds and thereby conferring on it a completely new task. According to the Draft Law, this right was being granted to CASPs in order to comply with Article 70(3) of MiCAR which reads that CASPs must place funds other than e-money tokens (EMTs) with a credit institution or a central bank. Without being subtle on its lack of enthusiasm on the aforementioned proposal the Opinion states outright that "...the ECB does not support the provision of the draft law (...)"2 and invites the Latvian authorities to remove the applicable provisions from the draft law entirely so as to not create any friction with what competences conferred on the Eurosystem.
Key takeaways
In December 2023 Latvijas Banka approved an initiative that would allow CASPs (as well as other non-bank payment service providers) to open an account with it for the segregation of customer funds as mandated under MiCAR. The segregation of customer funds is one of the key authorisation requirements for CASP (and crypto-asset issuers (CAIs)) as set out in Title V of MiCAR.
While certain financial institutions, including credit institutions, investment firms, e-money institutions and central securities depositories may benefit from less onerous authorisation requirements to become licensed as a CASP under MiCAR, certainly when compared to previously unregulated institutions, a description on the procedure for segregating clients' crypto-asset funds must be prepared by all applicants.3 In conjunction with Article 70(3) MiCAR, which concerns clients' crypto-assets and funds safekeeping, CASPs are obliged to place clients' funds other than e-money tokens (i.e. one type of MiCAR regulated stablecoin) with a credit institution or a central bank by the end of the business day following the day on which these funds were received.
It is against this backdrop above that the Draft Law seeks to grant CASPs the right to have direct access to an account held at Latvijas Banka by concluding an account service agreement with the latter. This, however, as highlighted in the Opinion, stands in stark contrast with the powers that the Statute of the European System of Central Banks (the ESCB)4 sets out in relation to the monetary functions and operations of the ESCB.
The Statute of the ESCB, as primary EU law, enjoys supremacy over the national laws of EU Member States and thus Latvia. On the basis thereof and in the context of conducting their monetary operations, Article 17 of the Statute of the ESCB sets out that the ECB and national central banks (NCBs) "may (rather than shall)"5 open accounts for market participants. Insofar as the decisions relating to monetary policy operations are taken by the Governing Council of the ECB, the decision to open accounts for market participants is subject to the overall authority of the Governing Council with respect to the monetary policy operations of the Eurosystem which, as of 1 January include Latvijas Banka.
Rather surprisingly therefore, in its press release dated 15 December 2023, Latvijas Banka announced that it would introduce this additional service of opening accounts for CASPs to allow for the segregation of their customer funds already starting June 2024 (should the corresponding Draft Law implementing these changes be approved, of course). Four days prior to this envisaged starting date, on 27 May 2024, the ECB appears to have caught the Latvian authorities as well as industry representatives and certainly crypto-asset market participants off-guard by clarifying its views in the Opinion.
In its observations, the ECB underlines Recital 82 of MiCAR which clarifies that clients' funds (in the form of banknotes, coins, scriptural money or e-money) may be placed with central banks only where an account with the central bank is available in the first place. Aside from the monetary policy purposes mentioned above, accounts may also be held with the ESCB in the context of the Eurosystem's euro payment system, i.e. TARGET. Accounts in TARGET are only available to entities fulfilling certain eligibility criteria as determined by the Governing Council which bind all Eurosystem central banks, including Latvijas Banka as mentioned above. These are laid down in Guideline (EU) 2022/912 (the TARGET Guideline) and limit participation in TARGET to credit institutions, investment firms, Eurosystem central banks or the treasury departments of Member State (regional) governments and authorities. In falling short of the entities in scope of participation under the TARGET Guideline, CASPs are currently not eligible to hold TARGET accounts.
While the ECB may be closing the door on national efforts to allow CASPs to open accounts at NCBs as a matter of national law, the ECB leaves the door ajar by stating that it and the Eurosystem as a whole expects to release details on a harmonised approach on non-bank payment service providers' (possibly also CASPs) ability to access central bank operated payment systems and safeguarding accounts.
Outlook and next steps
Although ECB Opinions are not legally binding, the ECB's competence to deliver opinions is enshrined in EU primary law. With regards to the Draft Law and its potentially material influence on the stability of financial institutions and of markets, the ECB has therefore adopted the Opinion, which admittedly resonates in effect (although not in drafting) more like an injunction. Aside from the evident legal obstacles to the Draft Law, in light of ensuring a level playing field it may well have been possible that other EU Member States would have followed suit and allowed CASPs to open accounts at their respective NCBs.
Notwithstanding the above, in issuing its Opinion, the ECB also took the occasion to signal its ongoing work on the issue of access to central bank operated payment systems and safeguarding accounts for non-bank payment service providers, with the aim of presenting a harmonised approach of the Eurosystem. This is because opening accounts with Eurosystem central banks for purposes other than monetary policy operations and TARGET payments is at the current juncture still fragmented across the Eurosystem. Whether CASPs will make the cut or not remains to be seen. Much of that will also depend on CASPs (but also CAIs) compliance with MiCAR and related regulatory reforms that are being rolled out in 2024 and beyond.
Footnotes
1. CON/2024/28, available here.
2. Section 2.1 CON/2024/28, available here.
3. See Articles 60(7)(d) and 62(2)(k) MiCAR, available here.
4. the Statute of the European System of Central Banks and of the European Central bank, available here.
5. Section 2.2 CON/2024/28, available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.