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EU banks face strict crypto rules in new published legal draft

EU banks face strict crypto rules in new published legal draft
Jordan Major

While more specific guidelines are being worked out, new restrictive rules for European Union banks have been confirmed in a publish legal draft.

EU banks would be required to apply the highest possible risk weight on cryptocurrency assets, according to a draft rule that was released by the European Parliament on Friday, February 10.

The way that conventional financial institutions interact with digital assets may be determined by the laws that are now being developed. As part of the agreement, financial institutions will be required to report both their direct and indirect exposure to cryptocurrencies during the time that the European Commission is drafting more granular regulations for the industry.

“The potentially increasing involvement of [financial] institutions in crypto-assets related activities should be thoroughly reflected in the Union prudential framework, in order to adequately mitigate the risks of these instruments for the institutions’ financial stability,” said an explanation text provided by the parliament’s Economic and Monetary Affairs Committee. 

The draft added:

“This is even more urgent in light of the recent adverse developments in the crypto-assets markets.”

Proposed risk weight 

Banks would have to hold capital equal to the amount of crypto they have, unlike other assets like mortgages, so the suggested risk weight of 1,250% doesn’t provide them much of a reason to store crypto. 

The worldwide capital norms established by the Basel Committee for Banking Supervision are called for in the proposed bill, and the European Commission is tasked with proposing further laws to implement them by June. The Committee has suggested setting a strict limit on the number of unbacked cryptocurrencies that banks may store, such as Bitcoin (BTC). However, this recommendation is not included in the EU’s regulatory draft. 

The EU’s member states are convening as the Council and the EU parliament both need to approve the measures for them to become law.

Proposed risk weight 

Elsewhere, at the start of February, the European Investment Bank (EIB) announced the issuance of its first-ever sterling-denominated digital bond, leveraging both public and private blockchains.

According to EIB, the digital bond worth £50 million ($61.60 million) was delivered in collaboration with BNP Paribas, HSBC, and RBC Capital Markets.

Despite a difficult economic environment and rising geopolitical tensions, the European banking industry has shown its durability and flexibility. The industry’s capacity to expand total assets, despite adverse market circumstances, is a testament to its resiliency. 

Indeed, as of January 23, 2022, figures compiled by Finbold showed that the total assets held by banks in EU member states were €29.01 trillion, an increase of 11.54% YoY (or €2.29 trillion) from the €26.72 trillion reported in Q3 2021.

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