According to the new draft rules for the European Union, banks that are currently holding cryptocurrencies may soon be legally obligated to assign the highest possible risk rating to digital assets.
The legal draft that has been published shows that until 2024, banks would be required to give a proposed risk rating to their entire crypto holdings of around 1,250%.
This means that in order to hold these cryptocurrencies, they would have to have an equal amount of capital to back them.
The new draft rules will have to have parliamentary approval first before they can go into effect. In the long term, the requirements that banks may have to conform to might be a bit different.
These would be significantly larger and were laid out by the Basel Committee on Banking Supervision (BCBS) in December 2022, but are expected to be implemented from January 2025 onwards.
The EU’s latest announcement dictates that a legislative proposal will be adopted by the Commission by a deadline of 31st December 2024.
This would incorporate some of the aspects of BCBS standards into the European Union law in the long run.
The changes that are expected to be made to the reporting and capital requirements had first been reported in the previous month.
The requirements that the Basel Committee has highlighted have different capital requirements for different cryptoassets.
The documentation indicates that popular cryptocurrencies, such as Bitcoin (BTC) and Ethereum (ETH) would be categorized as Group 2 cryptoassets.
The committee has divided these assets further into two groups. First is Group A which covers crypto assets, such as derivatives and Exchange Traded Funds (ETFs) that people can trade on regulated public markets.
The same does not apply to go Group B. Assets that fall in this particular group will have a risk rating of 1,250%, while the requirements will be lower for the assets that fall in Group A.
Other forms of crypto assets that are placed in Group 1 will have lower capital requirements, which would also apply to potential central bank digital currencies (CBDCs).
The group will also include the tokenized form of traditional assets, such as equities. Stablecoins that do not depend on an algorithm for maintaining their price stability will also fall in this group.
Furthermore, the new rules also come with strict restrictions on the amount of Type 2 crypto assets that banks will be permitted to keep on their balance sheets.
The total exposure of the bank should not be more than 2% of its capital to crypto assets that are part of the Group 2 category.
The proposed rules indicate that it is best to keep this exposure to 1%, but it cannot exceed 2% at any cost.
The announcement from the EU Commission showed how essential it has become to mitigate the risks associated with the crypto market in light of the adverse developments in the space of late.
They have shown that the existing rules are not enough for managing the risks that are inherent in digital assets.