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

Under new draft EU rules, banks holding cryptocurrencies may soon be forced under law to assign the digital assets the highest possible risk rating.

As per the published legal draft, banks would need to give all their crypto asset exposure a proposed risk weight of 1,250% until December 2024, meaning they will be forced to hold an equal amount of capital matching the crypto they hold.

These rules are still set for parliamentary approval.

Longer term, banks may need to conform to a larger set of new requirements laid out in a late December 2022 document from the Basel Committee on Banking Supervision (BCBS), which is set to come into play during January 2025.

According to the latest announcement from the EU, the Commission is set to adopt a legislative proposal by 31 December 2024 that would look to transpose elements of the BCBS standards into EU law in the long term.

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

Capital requirements for crypto

The capital requirements outlined in the Basel committee’s requirements are set to differ depending on the type of cryptoasset looked at.

Well-known cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) would be considered to be Group 2 cryptoassets according to the documentation.

Group 2 assets are then subdivided into two groups by the committee: Group A, which covers crypto holdings that are made via ETFs or other derivatives, which can be traded on regulated public markets, and Group B where this isn’t the case.

Group 2 B assets will be given a proposed risk weight of 1,250%, whereas Group 2 A will be subject to lower requirements.

However other forms of crypto assets, such as tokenized versions of traditional assets like equities, some types of stablecoins which don’t rely on algorithms to maintain their price, and potential Central Bank Digital Currencies (CBDCs) would fall under lower capital requirements and are considered to be in Group 1.

In addition, under the new rules there will be strict limitations on the proportion of Type 2 crypto assets which banks will be able to hold on their balance books.

A bank’s total exposure to Group 2 crypto assets must not exceed 2% of the bank’s capital and should generally be lower than 1%, according to the proposed rules.

Commenting on the move, the EU Commission’s announcement highlighted how “recent adverse developments in the crypto-assets markets” have made mitigating the risk of crypto assets urgent, saying that “existing prudential rules are not designed to adequately capture the risks inherent to crypto-assets.”