On Thursday, as part of its second consultation on the regulatory treatment of crypto assets, the Basel Committee on Banking Supervision proposed that banks should limit their exposure to Group 2 crypto assets to only 1 percent of their core capital.
Group one digital assets are, for example, tokenized traditional assets such as synthetic stocks or assets with effective stabilization mechanisms such as regulated stablecoins. This proposal provides for Group 1 digital assets to be subject to at least the same risk-based capital requirements as traditional assets under the current capital requirements (Basel III).
Cryptocurrencies that do not meet the above requirements are classified as group 2 digital assets, which theoretically include the most important cryptocurrencies that are not stablecoins or tokenized, such as Bitcoin (BTC) and most altcoins. Therefore, banks could invest only 1 percent of their total equity or net asset value in long or short positions in group 2 digital assets.
The Basel Committee is also considering that banks will introduce a risk premium of 1,250 percent for Group 2 digital assets. In comparison, a risk premium of 20 percent to 150 percent applies to shares, depending on the creditworthiness of the company. According to Basel III, a bank’s risk-weighted assets may not account for more than 10.5 percent of its core capital. This achieves an appropriate level of indebtedness.
Such a measure would likely severely limit banks’ ability to buy volatile cryptocurrencies in the future, as a bank would have to add $125 million worth of risk-weighted assets to its portfolio for every $10 million worth of Bitcoin purchase. This would make them far less lucrative than assets with lower mark-ups. Basel III is an international regulatory agreement that almost all financial institutions in developed countries must adhere to. This is also enforced.
