The European Central Bank (ECB) has instructed EU banks to set limits on their Bitcoin holdings in anticipation of global cryptocurrency standards set by the Basel Committee on Banking Supervision (BCBS). Despite cryptocurrencies not having a significant impact on EU banks, the ECB has urged them to recognize them as risky investments and restrict holdings. In a newsletter released on Wednesday, the ECB recommended that if banks want to engage with cryptocurrency markets, they should “comply with the standard.”
The BCBS has recommended assigning unbacked digital assets such as Bitcoin a maximum risk weight of 1,250%. Banks must issue as much capital as they hold in cryptocurrencies and avoid owning cryptocurrency in quantities exceeding 1% of their Tier 1 core capital. Additionally, a recent ECB study revealed that distributed ledger technology has little implementation across banks.
The global cryptocurrency banking rules proposed by BCBS are expected to take effect from January 1, 2025. These standards will provide a standardized regulatory and supervisory approach worldwide for banks’ exposure to crypto assets, according to the newsletter. Moreover, they aim to balance efficient bank risk management, financial stability, and responsible private-sector innovation.
The cryptocurrency space has witnessed significant disasters in the last year, and it is not surprising that regulators are stepping in. Several Wall Street firms in the US have expressed interest in entering the cryptocurrency field. With the arrival of global regulations, we may witness a surge in banks venturing into digital assets. In the absence of proper regulation, financial institutions have been reluctant to participate in the cryptocurrency industry.
In conclusion, EU banks must acknowledge the risks associated with cryptocurrency investments and limit their exposure to them to comply with the BCBS standards. The global cryptocurrency standards that will take effect from January 1, 2025, aim to create a worldwide regulatory and supervisory approach for bank risk management while also fostering responsible private-sector innovation.
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