The European Central Bank (ECB) expects EU banks to introduce limits on their crypto holdings even before the Basel Committee on Banking Supervision’s (BCBS) global standards come into force in 2025.
These standards have grouped cryptocurrencies into two groups based on the specific risks they pose, providing banks guidance on how to manage their exposure to each group.
Bitcoin, for example, has been defined as an “unbacked” asset placed into group 2 of risky assets. Included in this tier, are any assets that don't meet the BCBS' classification conditions, which include the asset's ability to avoid "material risks" and address money laundering concerns.
Stablecoins with "ineffective" mechanisms for maintaining their peg, for example, would also fall into this group.
As such, they “are subject to a newly prescribed conservative capital treatment with a risk weight of 1,250%” and an exposure limit below 1% of banks’ Tier 1 capital, the ECB said in a newsletter Wednesday.
Draft EU Rules Will Force Banks to Give Cryptocurrencies Highest Risk Rating
Under new draft EU rules, banks holding cryptocurrencies may soon be forced under law to assign the digital assets the highest possible risk rating. As per the published legal draft, banks would need to give all their crypto asset exposure a proposed risk weight of 1,250% until December 2024, meaning they will be forced to hold an equal amount of capital matching the crypto they hold. These rules are still set for parliamentary approval. Longer term, banks may need to conform to a larger set of...
As opposed to Group 2, cryptocurrencies belonging to Group 1 include tokenized versions of traditional assets, some types of stablecoins which don’t rely on algorithms to maintain their price, and potentially Central Bank Digital Currencies (CBDCs).
The recommendation follows new draft EU rules released earlier this week, which stipulate that banks holding cryptocurrencies may be obliged to assign the digital assets the highest possible risk rating of 1,250%, meaning they will be forced to hold an equal amount of capital to match the crypto they hold.
Crypto-related risk management arrangements
The ECB argues that even though the BCBS standard isn't yet law, banks interested in entering the crypto market "are expected to comply with the standard and take it into account in their business and capital planning,”
Before rolling out crypto services, banks must ensure that the services or products are in line with the firm's "risk appetite and its strategic objectives" as defined by its respective board.
EU Lawmakers Pave Way for Stricter Crypto Rules for Banks
European lawmakers have approved a bundle of changes that will impose steep new requirements on banks that have business dealings in crypto. The European Parliament’s Economics and Monetary Affairs Committee today passed cross-party compromises which will require banks to hold more capital to protect against potential crypto losses. A spokesperson for the Committee confirmed to Decrypt that the measures adopted include a requirement for banks to disclose if they are exposed to cryptocurrencies....
Applying adequate guardrails for onboarding cryptocurrencies is nothing new in Europe. Last month, the European Parliament’s Economics and Monetary Affairs Committee passed a draft law that will require banks to hold more capital to protect against potential crypto losses.
A spokesperson for the Committee confirmed to Decrypt at the time that the new measures also require banks to disclose if they have any exposure to cryptocurrencies.
Before taking effect, the new law will need approval from the European Parliament, as well as EU finance ministers.
