Draft EU Rules Will Force Banks to Assign Highest Risk Rating to Cryptocurrencies

According to the new draft EU rules, banks holding cryptocurrencies may soon be required to assign the highest possible risk rating to digital assets.

According to the published legal draft, banks should assign a proposed risk weight of 1,250 percent to their exposure to crypto assets by December 2024, meaning they will be forced to hold an equal amount of capital corresponding to the cryptocurrency they own. These rules are still awaiting parliamentary approval.

In the long term, banks may need to comply with a larger set of new requirements established in the Basel Committee on Banking Supervision (BCBS) document at the end of December 2022, which is expected to come into effect in January 2025.

According to the latest EU announcement, the Commission should present a legislative proposal by December 31, 2024, which will, in the long term, transpose elements of the BCBS standards into EU law.

These upcoming changes to capital requirements and reporting requirements were confirmed by an EU spokesperson in January 2023, after Reuters first reported news of the increased capital requirement.

Capital Requirements for Crypto

The capital requirements outlined in the Basel Committee’s requirements should vary depending on the type of crypto asset being considered. Well-known cryptocurrencies such as bitcoin and ethereum would be classified as group 2 crypto assets according to the documentation.

The Committee then divides group 2 assets into two categories: category A, which includes crypto shares in ETFs or other derivatives that can be traded on regulated public markets, and category B, where this is not the case. Group 2 B assets will receive a proposed risk weight of 1,250 percent, while group 2 A will be subject to lower requirements.

However, other forms of crypto assets, such as tokenized versions of traditional assets like stocks, certain types of stablecoins that do not rely on algorithms to maintain their price, and potential central bank digital currencies (CBDCs) would be subject to lower capital requirements and classified as group 1.

Additionally, under the new rules, there will be strict limits on the group 2 crypto assets that banks can hold on their books. A bank’s total exposure to group 2 crypto assets must not exceed 2 percent of the bank’s capital and should generally be lower than 1 percent, according to the proposed rules.

Commenting on this move, the European Commission’s announcement highlighted that recent adverse developments in crypto markets require urgent risk assessment, stating that existing prudential rules are not designed to adequately cover the risks inherent in crypto assets.