EU Votes To Allow Banks To Hold 2% Of Assets In Crypto

January 25, 2023 2:38 pm Comments

The European Union just voted on a new regulation that may be positive for the overall crypto industry and will facilitate faster mainstream adoption.

Essentially, the Economic Affairs Committee of the European Parliament just approved a new bill that will allow banks to hold a maximum of 2% of their capital in Bitcoin and other crypto assets.

Although 2% may seem like a small number, this is 2% of all the assets under management for many large banks which makes it a sizeable amount.

Also, it is considered a major improvement to the previous number where banks used to only be encouraged to have a maximum 1% of their assets in crypto.

With that being said, it seems that the European Union still considers cryptos as the riskiest type of asset which is why they have assigned a high risk weight to crypto.

Bitcoinist reports:

In doing so, the European Union is following the Bank of International Settlement (BIS), which essentially divides cryptos into two distinct groups. Group 1 represents tokenized assets and stablecoins with approved stabilization mechanisms, while it is questionable whether Tether or USDC meets the requirements.

Group 2 includes stablecoins without BIS-approved stabilization mechanisms and volatile cryptocurrencies. This group classification entails that Bitcoin, Ethereum, and other cryptos require banks to apply a “risk weight” of 1,250%.

This means that European banks must hold more than one euro of free capital for every euro of cryptocurrencies. Markus Ferber, a German member of the European People’s Party in the EU Parliament, said that the effort is designed to “prevent instability in the crypto world from spilling over into the financial system.”

If the crypto industry continues to grow and mature in the next decade, it is possible that EU banks may eventually allocate even more capital to crypto.

By that time, the crypto industry would be considered a multi-trillion dollar market cap industry once institutional investors consider it an essential part of a bank’s portfolio.

The focus on crypto regulation has been increasingly high in the past few months due to the high number of crypto firm collapses due to the bear market.

Some of the focus is on trying to protect investors while others are focused on trying to provide clear regulation guidelines for the industry in order to facilitate more growth and innovation.

This new approval by the European Parliament’s Economic Affairs Committee can be considered a step in the right direction and comes during a time when Bitcoin has recovered to around $23k.

Bitcoinist concludes:

As Ferber has indicated, lawmakers cite the chaos in the crypto market in recent months as further evidence that such regulation is needed. The United States, the United Kingdom, and other countries are taking similar steps, with the European Union setting a unique precedent with its requirement that banks must hold enough capital to fully cover holdings of Bitcoin and cryptocurrencies.

Notably, yesterday’s approval by the European Parliament’s Economic Affairs Committee is the first step in the approval process. The directive still needs to be approved by the entire European Parliament in July and submitted to national finance ministers in the Council of the European Union for the regulations to take effect.

Even though the regulations can be very negative at first glance, it should be emphasized that the BIS and the EU do not want to issue a Bitcoin and crypto ban for European banks, but only want to introduce a limit, as well as capital coverage.

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