EU banks are set to face new restrictive rules regarding the handling of cryptocurrency assets. A published legal draft requires European Union banks to apply the highest possible risk weight on cryptocurrency assets, indicating the potential risks of these instruments to institutions’ financial stability.
The potentially increasing involvement of [financial] institutions in crypto-assets related activities should be thoroughly reflected in the Union prudential framework, in order to adequately mitigate the risks of these instruments for the institutions’ financial stability.
EU parliament’s Economic and Monetary Affairs Committee.
The proposed bill calls for worldwide capital norms established by the Basel Committee for Banking Supervision. The European Commission is tasked with proposing further laws to implement them by June. The Committee has suggested setting a strict limit on the number of unbacked cryptocurrencies that banks may store, such as Bitcoin (BTC).
Under the new rules, banks would have to hold capital equal to the amount of crypto they have, unlike other assets like mortgages. The proposed risk weight of 1,250% means that banks would have little incentive to store crypto. Todayq news initially reported that EU might go ahead with this move.
While more specific guidelines are being developed, the proposed laws require financial institutions to report both their direct and indirect exposure to cryptocurrencies. The laws could determine the way conventional financial institutions interact with digital assets.
The EU’s member states are convening as the Council and the EU parliament both need to approve the measures for them to become law. Meanwhile, the European Investment Bank (EIB) has announced the issuance of its first-ever sterling-denominated digital bond worth £50 million ($61.60 million), delivered in collaboration with BNP Paribas, HSBC, and RBC Capital Markets.
According to EIB, the bond was issued on a public blockchain network called Ethereum and was the first time a private blockchain was integrated into the issuance process.
Despite a difficult economic environment and rising geopolitical tensions, the European banking industry has shown its durability and flexibility. As of January 23, 2022, the total assets held by banks in EU member states were €29.01 trillion, an increase of 11.54% YoY from Q3 2021, as reported by Finbold.
The move to impose stricter rules on cryptocurrencies comes as digital assets are experiencing increasing institutional adoption. Despite the growing interest in digital currencies, they remain volatile and unregulated. This has raised concerns about their potential risks, including fraud and money laundering.
Earlier this month, the US Federal Reserve Chair, Jerome Powell, spoke about the need for strict regulation of cryptocurrencies. He warned that these assets could pose risks to the financial system and consumers.
The UK’s Financial Conduct Authority has also warned investors about the risks associated with cryptocurrency investments. They noted that investors should be prepared to lose all of their investment as these assets are unregulated and offer no consumer protections.
While there is growing interest in digital assets, it is clear that regulatory oversight is needed to manage the risks. The new proposed laws could be a first step in regulating the industry and mitigating the risks associated with cryptocurrencies.