Basel Committee presses on with restrictive requirements for banks’ crypto holdings

The committee of central banks and regulators has proposed a “conservative prudential treatment” of crypto assets that banking groups say is prohibitive.

The Basel Committee on Banking Supervision met Friday and discussed cryptocurrency, among other topics. The committee stated that it would soon publish its second consultative paper with the intention of finalizing guidelines on the prudential treatment of crypto exposure by banks by year-end.

In a Tuesday press release, the committee issued the following statement, which was likely in reference to the recent collapse of the Terra ecosystem:

“Recent developments have further highlighted the importance of having a global minimum prudential framework to mitigate risks from cryptoassets.”

The committee began consultations on the banking sector’s risk exposure to cryptocurrency in 2021 and published a paper on its findings at that time. The committee divided crypto assets into two groups, with tokenized traditional assets and stablecoins forming one group, and all others forming the second. A 1,250% risk weight was assigned to the second group, which included all cryptocurrencies and their derivatives. That meant a bank was expected to hold $1 in fiat money for every $1 worth of cryptocurrency it held.

The committee’s “conservative prudential treatment” led to objections from banking industry groups. The International Swaps and Derivatives Association (ISDA), the Futures Industry Association (FIA), the Institute of International Finance, the Chamber of Digital Commerce and five other organizations said in a letter to the committee that the proposed requirements amounted to “material impediments to regulated bank participation in crypto asset markets.”

The Basel Committee on Banking Supervision is made up of central banks and regulators from 28 countries and jurisdictions, as well as three observer countries and five agencies. It is supported by the Bank for International Settlements, but its decisions do not carry the force of law.