Although the global regulatory framework set out by the Basel Committee on Banking Supervision (BCBS) will not become legally binding before 2025, the European Central Bank (ECB) expects banks in the European Union (EU) to start applying caps on Bitcoin (BTC) holdings in the meantime.
Indeed, the ECB supervisors cited the “significant risk and boom-and-dust cycles” of cryptocurrencies, advising the banks that plan to introduce them into their operations to start planning compliance with the upcoming law right away in the newsletter from February 15.
Although they acknowledged that some banks “have explored opportunities” to use blockchain in improving efficiency, lowering costs, and providing new services to clients, the supervisors said that digital assets “are not widely used in mainstream banking operations” yet.
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Tackling risks in advance
However, they believe “the expansion of the crypto industry can also lead to crypto-asset risks spilling over into the banking sector,” and “if a bank were to acquire exposures to crypto-assets – either directly or indirectly – they would face significant risks not specifically covered by the current prudential framework.”
Therefore, to avoid potential problems, the ECB advises such banks:
“The BCBS standard is not yet legally binding pending its transposition in the European Union. 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.”
Up to 1% Bitcoin caps
As a reminder, the committee hosted by the Bank of International Settlements (BIS) recently proposed that banks assign the highest possible risk weight of 1,250% to unbacked digital assets such as Bitcoin, which means they have to issue capital equal to their crypto holdings, and limit those holdings to 1% of their core capital.
Specifically, they grouped cryptocurrencies into two groups – Group 1, which includes tokenized traditional assets and stablecoins that meet classification conditions, and Group 2, which refers to assets that do not meet classification conditions and include ‘unbacked digital assets,’ as well as specific stablecoins and tokenized traditional assets.
In October, Finbold reported on BCBS’s Basel III Monitoring Report, which found that the total exposure to digital assets by global banks still remained relatively low, amounting to approximately €9.4 billion or roughly 0.14% of the overall crypto exposure by banks around the world, whereas taking into account the banks that do not report such exposures, this amount dropped to 0.01%.
