The European Insurance and Occupational Pensions Authority (EIOPA) has recommended a sweeping policy overhaul that would require insurance firms to hold capital equal to the full value of their crypto asset holdings. This proposal, submitted to the European Commission on March 27, marks a significant shift in how the European Union is approaching crypto regulation within the insurance sector. The watchdog cited the “inherent risks and high volatility” of cryptocurrencies, making them unsuitable for partial backing models currently applied to traditional asset classes like stocks or real estate.

In its report, EIOPA outlined four potential routes for the European Commission to consider. The most lenient option was to make no changes, followed by applying an 80% stress level on crypto assets. However, the agency strongly recommended the strictest route: a 100% stress level. This essentially assumes that crypto asset prices could drop to zero and that diversification would not reduce the associated risk. Such a stance reflects the authority’s view that crypto cannot be treated like other asset classes within solvency frameworks.

The reasoning behind the 100% capital requirement is grounded in historical volatility. EIOPA pointed out that Bitcoin and Ether — two of the most prominent cryptocurrencies — have in the past plunged by 82% and 91% respectively. In contrast, under existing regulations, capital charges for stocks range from 39% to 49%, while real estate is charged at 25%. The proposed move would therefore put crypto assets in a much riskier bracket, demanding full capital coverage.

Despite the tough stance, EIOPA argued that the requirement wouldn’t create a financial burden for policyholders. They emphasized that a full capital charge would actually enhance policyholder protection in the long run, especially if crypto exposure becomes more widespread in the insurance industry. At present, crypto-related undertakings represent just 0.0068% of the total insurance landscape in Europe — equivalent to about €655 million — making the exposure largely “immaterial” for now.

Nevertheless, certain countries could feel the impact more than others. Luxembourg and Sweden hold the majority of crypto-related exposures, with 69% and 21% of the European share respectively. Other nations like Ireland, Denmark, and Liechtenstein also have minor exposure. Most of these holdings are structured through exchange-traded funds and are tied to unit-linked insurance policies, making them subject to fluctuations in value.

The European Union has been progressively tightening its grip on crypto regulation, with this proposal helping to bridge existing gaps between frameworks such as the Capital Requirements Regulation (CRR) and the Markets in Crypto-Assets Regulation (MiCA). EIOPA believes this new measure would reinforce the union’s commitment to safeguarding the financial system and consumers in a rapidly evolving asset landscape.

While EIOPA acknowledged that crypto remains a small part of the insurance sector today, it warned that broader adoption in the future could necessitate a more nuanced and differentiated approach. For now, however, the regulator maintains that treating crypto with a 100% stress level is the only prudent course of action.