European Banks Required To Fully Capitalize Crypto Holdings, Draft Proposal States

A leaked document reveals that banks will be mandated to categorize crypto as the most high-risk class of assets, per the final proposed amendments of the 2021 package, to align European Union bank capital regulations with global standards.

However, the Parliament Committee will vote on the 2021 EU bank capital rule amendments, which include a 1,250% risk weight for crypto exposure. In addition, Commission is to propose a bill by June 2023.

As per the international banking standards set up by the Basel Committee on Banking Supervision, the maximum level of risk that can be select for digital assets holdings is a 1:1 capital requirement, meaning banks cannot leverage and must hold an equal amount of capital as the value of crypto they hold.

Due to the inherent risks with crypto assets, the financial rules in place at this time are insufficient to handle them.,” as stated in an explanatory text accompanying the proposed law. “The need for such rules becomes even more pressing in light of the recent negative developments in the crypto market.

Moreover, the Commission’s detailed crypto-law proposal by 2024 includes an analysis of crypto assets risks, liquidity requirements, Banks to disclose crypto exposure, and risk management policies.

In December, the Basel Committee, a global regulatory body of central bankers, advised banks to exercise caution with crypto assets, limiting unbacked assets like Bitcoin to a mere 1% of their Tier 1 capital, an important gauge of an institution’s stability.

Crypto regulation post-Terra collapse and Bitcoin drop

However, the European Union has reached a historic decision to establish regulatory guidelines for the digital asset sector, as the recent market fall has tended to result in significant financial losses and calls for increased oversight on a global scale.

EU negotiators came to a final agreement on a comprehensive set of crypto rules, called Markets in Crypto Assets (MiCA) for the 27 member nations of the bloc.”

Stefan Berger, the senior legislator engaged in the rule-making process, declared that “today we placed an order in the Wild West of crypto assets and set clear rules for a unified market.”

In a statement, he said that the EU’s rules on cryptocurrencies “would create a unified market, give legal certainty for digital asset issuers, guarantee a fair playing field for service providers, and assure high standards for consumer protection.”

Furthermore, the new rules grant issuers of crypto assets and providers of associated services a “passport” to offer their services to clients throughout the EU from a single location while still adhering to capital and consumer protection rules.

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Similar to the EU’s pioneering data privacy policy, which has become a global norm, and its recent law aimed at addressing harmful content on digital platforms, the crypto rules are likely to have a significant impact on a worldwide scale.

According to Patrick Hansen, a venture capital fund’s crypto venture consultant, the EU rules are “truly the first complete piece of crypto rules in the world.”

Since the EU arrived first, “I think there will be a lot of jurisdictions who will look closely into how the EU has handled it,” said Hansen.