In the latest move to regulate the cryptocurrency market, EU banks are being urged to enforce caps on Bitcoin holdings ahead of the upcoming global norms set by the Basel Committee on Banking Supervision (BCBS).
The European Central Bank (ECB), which supervises the largest lenders in the Euro area, has advised banks to treat Bitcoin and other cryptocurrencies as risky and limit their holdings as soon as possible. Despite the fact that Bitcoin has not yet made significant inroads into the banks of the bloc, the ECB warns that the potential risks of cryptocurrencies should not be ignored.
According to a newsletter from the European Central Bank (ECB), which directly supervises the largest banks in the Euro area, the BCBS standard is not yet legally binding until it is transposed in the European Union. Nevertheless, the ECB advises banks to comply with the standard and take it into account in their business and capital planning if they wish to engage in the cryptocurrency market.
The Basel Committee on Banking Supervision (BCBS) has put forth a proposal that would require banks to assign a risk weight of 1,250% to unbacked digital assets, including popular cryptocurrencies like Bitcoin. This would mean that banks would be required to hold capital equal to 1,250% of their crypto holdings, the highest possible risk weight under Basel III standards. Additionally, the proposal suggests that cryptocurrency holdings should be limited to no more than 1% of a bank's Tier 1 capital, further limiting exposure to the volatile asset class.
The ECB has highlighted the importance of complying with the proposed BCBS standards, despite the fact that they are not yet legally binding. Banks that wish to engage in the crypto market are expected to take the standards into account in their business and capital planning.
In anticipation of the upcoming regulations, EU banks are expected to begin applying caps on cryptocurrency holdings. According to the ECB survey, cryptocurrency activities and exposure are currently "insignificant," and distributed-ledger technology is "barely used across banks." However, some legislators at the European Parliament have already expressed an interest in proposing rules that address key provisions of the BCBS proposals.
The enforcement of Bitcoin caps by EU banks is seen as a significant development in the regulation of the cryptocurrency market. While cryptocurrencies have become increasingly popular as a form of investment, their lack of regulation has raised concerns about their potential to be used for criminal activities such as money laundering and fraud.
By enforcing caps on Bitcoin holdings, EU banks are taking a proactive approach to mitigate the risks associated with cryptocurrencies. The move is expected to set a precedent for other global financial institutions to follow as they also seek to regulate the cryptocurrency market.