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.
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.
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.