Basel Committee Cracks Down: Banks Face New Crypto Rules

The recent Basel Committee meeting (July 2-3) focused on key policy decisions related to banks’ exposure to crypto assets. These decisions are part of the ongoing Basel III reforms, a series of regulations initiated in 2019 to strengthen the resilience of European Union banks through stricter supervision, risk management practices, and regulatory frameworks.

A proposal for a comprehensive disclosure framework for banks’ crypto holdings was initially presented in December 2022 and opened for public comments in May 2023. This framework has been revised and now includes targeted amendments to the original proposal, along with updates to the prudential standard for stablecoin holdings (cryptocurrencies designed to maintain a stable price). The Bank for International Settlements (BIS) announced that the finalized disclosure standards will be published later in July.

This increased transparency through mandatory disclosure is intended to benefit the market in two ways: firstly, by providing a clearer picture of bank involvement in the crypto space, and secondly, by encouraging responsible practices within the crypto industry itself.

The Basel Committee has been actively considering the issue of banks’ crypto exposure since 2019. Initially, a 2021 proposal suggested classifying crypto assets as high-risk “Group 2” assets, attracting a hefty 1,250% risk weight. This would have essentially mandated banks to hold capital reserves equivalent to the full value of their crypto holdings. Additionally, Group 2 asset holdings were restricted to a mere 1% of a bank’s total “Group 1” holdings (considered lower risk).

Stablecoins, on the other hand, received a more lenient initial classification as “Group 1b,” incurring no additional capital requirements beyond those for typical Group 1 assets. However, stablecoins deemed to possess inadequate stabilization mechanisms were subjected to the stricter Group 2 regulations. This initial proposal faced significant pushback from the crypto industry.

In December 2022, the committee proposed further measures, including setting a maximum maturity limit for banks’ reserve assets and requiring overcollateralization of stablecoin holdings to mitigate potential risks associated with price depegging (a situation where a stablecoin loses its peg to a fiat currency).

Beyond the Basel standards, the committee also acknowledged the regulatory implications of banks issuing their own stablecoins. While recognizing that existing Basel frameworks broadly address these risks, the committee has pledged to continue monitoring developments in this area.

Basel III Implementation Delayed

In a separate decision, the implementation of the revised Basel III standards has been postponed from its initial target date of January 1, 2025, to January 1, 2026. This delay allows banks additional time to adapt and comply with the new regulations.

It’s important to note that the Basel Committee on Banking Supervision, though hosted and supported by the BIS, operates under the governance and guidance of the central banks of the Group of 10 (G10) countries. These recent policy decisions represent a significant step towards establishing a more comprehensive and risk-focused regulatory framework for banks’ involvement in the crypto asset landscape.

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Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.

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