EU Lawmakers To Impose Restrictions On Banks Trying To Hold Crypto

January 24, 2023 10:13 am Comments

Recently, the European Parliament’s Economic and Monetary Affairs Committee just voted on some new restrictions that may limit the amount of crypto that banks can hold.

This may have some significant impact on the crypto markets as it will restrict the actions of many financial institutions that are involved in the space.

The purpose of such restrictions is that they will hopefully prevent any instability for the banks and will protect these traditional banks from the volatility of the crypto world.

For example, one type of rule that is imposed is for banks to have a euro of their own capital for every euro that they hold in crypto which prevents the bank from being overleveraged.

This way, the bank will never reach any dangerous states of insolvency as the majority of the EU lawmakers still see crypto assets as extremely high risk.

CoinDesk reports:

The Association for Financial Markets in Europe (AFME), a lobby group that represents traditional finance organizations such as investment banks, raised concerns that the scope of the amendment may be too wide.

“There is no definition of crypto assets in the [legislation] and therefore the requirement may apply to tokenized securities, as well as the non-traditional crypto assets the interim treatment is targeted at,” AFME said in an emailed statement, calling for drafting issues to be dealt with later in the legislative process.

The move mimics rules set out by the Basel Committee on Banking Supervision, the international standard-setter for the industry, which has proposed that holdings of unbacked crypto should be given the highest possible risk weighting, and also be limited as a proportion of a bank’s total issuance of core financial instruments.

In order to pass into law, the measures still need approval from the European Parliament and also have to be negotiated with national finance ministers who meet in the Council of the European Union (EU), as part of a fuller package of bank capital reforms.

The bright side out of all this, despite the restrictions, is that this indicates that a lot of traditional banks are actually interested in holding crypto.

Otherwise, law makers would not have even be concerned in the first place in passing laws that would impose restrictions.

As more and more financial institutions seek to diversify their assets, crypto is once again proving to be a new sector that can be used to diversify financial portfolios.

As more institutions that see this potential, it means that there will be a lot of new capital to fuel the long-term growth of the crypto industry and markets.

Crypto obtaining a multi-trillion market cap is then seen as a very obtainable target that may happen within the next decade.

Yahoo reports:

Foreign banks operating through branches in the EU will be watching the talks closely.

EU states have taken a more accommodative approach to when foreign banks serving customers in the bloc should open a branch, or convert a branch into a more heavily capitalised subsidiary, with EU lawmakers on Tuesday taking a harder line.

The EU is keen to build up “strategic autonomy” in capital markets as it faces a competing financial centre on its doorstep after Brexit.

AFME said it will be important to avoid “significant adverse impact” of tightening EU access to international markets and cross-border services.

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