ECB Watchdog Has a Cautious New Chief: Could Claudia Buch Open Banks To Crypto?

Key Takeaways

• The European Union passed its landmark MiCA legislation for crypto assets in April.
• Now, its central bank has appointed the next head of its supervisory board.
• Could the economist Claudia Buch loosen bank restrictions on digital assets?

On October 19, the European Council of its 27 member states appointed Claudia Buch as chair of the supervisory board of the European Central Bank, one of the world’s premier global financial institutions. 

Buch will take over  leadership of ECB Banking Supervision on January 1, 2024, from Andrea Enria, who has held the post since 2018. Her appointment comes at a challenging juncture, as central banks globally tighten monetary policy to combat inflation. On the crypto front, however, she faces implementing new banking standards during a time of general skepticism toward crypto markets. But what does her appointment mean for digital assets?

Who Is Claudia Buch?

Claudia Buch brings decades of economic and policy expertise to her new role leading the ECB’s banking supervision arm. After obtaining her PhD in economics from the University of Kiel in 1996, she steadily rose through the ranks of German academic and research institutions. 

Buch spent over a decade spearheading financial markets research at the renowned Kiel Institute for the World Economy before moving into central banking at the Deutsche Bundesbank in 2014. Known for her rigorous analysis, Buch has led key working groups on regulation for the Financial Stability Board and Basel Committee.

A Balanced Take on Crypto

In an address  to the Bank of International Settlements on April 20, Claudia Buch outlined a moderate and cautious approach to regulating cryptocurrencies.

Speaking at an event in Hohenheim, Buch argued that “risks inherent in crypto-asset markets require preventive regulation.” She warned that “even seemingly small pockets of distress can breed financial crises,” pointing to the subprime mortgage bubble that triggered the 2008 global financial crisis.

While acknowledging that crypto-assets “promise more innovative ways of providing financial services,” Buch stressed that they also entail similar risks as traditional finance, including “high market concentration, complexity, common exposures and high operational risk.”

Buch highlighted leverage as a key vulnerability. “High leverage is a risk for financial stability – in traditional finance as well as in crypto-asset markets,” she said. She cited the collapse of major crypto platforms like TerraUSD and FTX as examples of how leverage can propagate shocks.

Buch Emphasizes Caution and Rigor

The incoming ECB supervisor called for improved monitoring and reporting standards for crypto-asset providers to enable oversight of risks. She advocated for “minimum reporting standards” and limits on regulatory arbitrage across jurisdictions.

“Good regulation needs to err on the side of caution,” Buch stated. “The first line of defense against innovation that does more harm than good is informed consumers of financial services and strong consumer protection.”

The current Vice President of the Bundesbank has taken a relatively moderate stance on digital assets for years. Back in 2018, when crypto’s market cap was approximately 27% of what it is now, according to CoinGecko , the German economist warned against apocalyptic prophecies. 

“I don’t see a threat for financial stability at the moment as the speculations are generally not financed with loans and the relevant markets are rather small,” she said  in March 2018.

Although, things have changed immeasurably since then.

Don’t Expect Fireworks

Buch’s consumer-protection-first stance is unsurprising for an economist, academic and public servant. So far, so middle-of-the-road. 

As chair of the ECB’s supervisory board,  Buch will lead banking supervision for the eurozone, ensuring financial stability and compliance with prudential regulation. This powerful position entails oversight of around 120 major European banks, with some of the biggest in the world under her remit. 

Given Buch’s background as an economist focused on financial stability and her moderate take on crypto assets, she is likely to take a cautious, risk-averse approach. While open to financial innovation, she will likely emphasize preventive policies to limit threats to stability. In practice, this will mean pushing through conservative limits on banks’ exposure to crypto.

The European Union is set to pass  the Basel Standards  on crypto and banking into law by Janaury 1, 2025. Among other things, the Basel Standards set a limit of 1% of core equity assets for banks’ aggregate exposure to Group 2 cryptoassets like Bitcoin, with a hard cap of 2%. Exceeding 1% triggers stricter capital requirements.

It is unlikely Buch will push against these measures. Her priority will be safeguarding stability, not unleashing crypto finance.