EU To Fast Track Crypto Capital Rules For Banks

February 20, 2023 2:30 pm Comments

It looks like the European Union is receiving pressure to fast track its new capital rules for banks that hold digital assets which has huge implications for the crypto industry.

Essentially, there was a deadline that was set in 2025 that asks all banks to limit their exposure to digital assets like Bitcoin and stable coins to a certain percentage.

Whether or not that is actually feasible within the asked timeframe is still unknown, but the fact that there is such intention to limit the actions of the banks is quite alarming.

After all, it could severely limit the amount of new capital that goes into the crypto markets given that banks are likely the biggest institutional investors.

As of today, most banks still have a very low percentage of their assets in crypto as many are cautious about preventing the effects of the crypto market spill over into the traditional financial world.

Reuters reports:

“Banks have expressed interest in trading crypto-assets on behalf of their clients and to provide crypto-assets-related services.”

Basel’s standards are applied in the EU with a law, and a delay could mean that banks have to wait longer to enter the cryptomarket as separate EU rules for trading cryptoassets come into force in 2024.

To enforce Basel’s crypto rules, the EU could either propose a new law, or expand the banking law it is now finalising as called for by the European Parliament.

Parliament and EU states have equal say on the banking law and are due to start negotiating the final text, which could include the provisions on cryptoassets, the paper said.

The EU region is certainly one region that is limiting exposure in an effort to be cautious given that the crypto markets are still very volatile compared to many other financial markets.

The most important thing to note for investors is the understanding that they are at least not banning financial insitutions like banks from holding digital assets.

It is merely a cap limit for the banks which may potentially increase over time as governments start to understand the benefits of digital assets over fiat.

It is expected that many other regions will also soon start implementing the same rules for their banks which will slowly increase the amount of capital in the crypto markets over the next decade.

CoinDesk concludes:

“The BCBS standard is not yet legally binding pending its transposition in the European Union,” said a newsletter from the ECB, which is responsible for directly supervising the largest banks in the currency bloc.

“However, should banks wish to engage in this market, they are expected to comply with the standard and take it into account in their business and capital planning.”

The BCBS recently proposed to assign the highest possible risk weight of 1,250% to unbacked digital assets such as bitcoin (BTC), meaning banks have to issue capital equal to their crypto holdings.

They would also be limited to holding crypto in amounts not exceeding 1% of their core capital known as Tier 1.
BCBS norms don’t have legal effect, though some lawmakers at the European Parliament already want to bring forward rules addressing key parts of the supervising body’s proposals.

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