The European Banking Authority (EBA) has finalized draft rules requiring banks to hold more capital against so-called "unsecured" cryptocurrencies like Bitcoin and Ethereum.
The EBA stated in the final draft of its regulatory technical standards released on Tuesday that these rules aim to "address implementation issues and ensure a coordinated approach to capital requirements for exposure to crypto assets across EU institutions." The framework applies to EU banks holding crypto assets on their balance sheets.
Once the final draft is submitted to the European Commission, Brussels will have up to three months to decide whether to approve it as is, approve it with modifications, or return it for re-drafting. Upon approval, the legislation will become a delegated regulation and be forwarded to the European Parliament and Council, which will have a three-month objection period that can be extended to six months.
According to the accompanying documents, Group 2 (a and b) digital assets are subject to a "general 1250%" risk weight. Group 2b refers to "other" crypto assets, including unsecured assets like Bitcoin (BTC). Group 2a refers to a subcategory of similar assets that meet the International Bank for Settlements' hedging and netting standards.
Group 1b refers to so-called asset reference tokens linked to traditional financial instruments. This group is subject to a 250% risk weight.
These risk weights are introduced as part of the Capital Requirements Regulation (CRR III) and will take effect in July 2024.
The latest EBA draft adds technical elements necessary for calculating and aggregating crypto exposure, such as credit risk, market risk, and counterparty risk modeling. It also introduces strict separation between assets, meaning Bitcoin and Ethereum (ETH) cannot offset each other.
If neither the European Parliament nor the Council objects, the draft will take effect 20 days after its publication in the EU Official Journal.
These rules are expected to directly impact European banks that already hold cryptocurrencies on their balance sheets. Italian bank Intesa Sanpaolo purchased Bitcoin worth €1 million in January, and under the draft framework, the bank would need to hold €12.5 million in capital for that position.
Fintech company Revolut is unlikely to be affected by this change. The bank's cryptocurrency services are off-balance-sheet operations managed by its non-banking division, Revolut Digital Assets Europe Ltd.
The EBA's stance sharply contrasts with the broader direction of global regulators embracing cryptocurrencies within the existing financial framework.
In late March, the U.S. Federal Deposit Insurance Corporation (FDIC) stated in a letter that institutions under its supervision (including banks) can now engage in cryptocurrency-related activities without prior approval.
In April, Switzerland passed an amendment to its distributed ledger technology law, allowing banks to custody tokenized securities and provide guarantees for stablecoin issuers under a clear legal framework.
Recent reports also indicate that former U.S. President Trump plans to sign an executive order directing banking regulators to investigate the cryptocurrency industry and allegations of de-banking raised by conservatives.
The U.S. banking sector has begun to take notice, with reports that JPMorgan is exploring cryptocurrency-backed loans, indicating a potential shift in U.S. banks' views on crypto assets.
The new EU capital rules may limit banks' participation in the growing digital asset market, especially as decentralized finance and tokenization continue to expand into mainstream financial services.
Related: SBI plans to launch Japan's first dual ETF for Bitcoin (BTC) and Ripple (XRP)
Original: “EU Regulators Finalize Draft Rules for Banks Holding Bitcoin (BTC) and Ethereum (ETH)”
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