Key Takeaways:
- Financial firms may need to retain more capital under new regulations in Europe if they are planning to buy crypto.
- The action, which is a stopgap measure until additional EU legislation, is in sync with suggestions made by international monetary authorities.
According to a document that outlines the final set of planned adjustments to a proposal planned in 2021 meant to bring E.U. bank capital rules in accordance with global standards, banks in the European Union would be compelled to treat cryptocurrency as one of the riskiest classes of holdings.
Following a vote in a committee of the European Parliament on Tuesday, MPs agreed that banks holding cryptocurrency must adhere to severe legislation to maintain capital needs.
The Economic Affairs Committee of the European Parliament endorsed a draft proposal to implement Basel III capital regulations beginning in January 2025, while also supporting a number of transitory divergences to give banks additional time to adjust.
Banks will be ordered to assign a risk-weighting of 1,250% of capital to crypto asset exposures as fulfillment of these criteria. According to Basel Committee recommendations, this absurdly high sum is intended to cover a total loss in asset value.
The new regulations must be approved by the European Parliament and the EU’s finance ministers in order to become law.
The draft regulation does not define crypto assets, according to the industry group Association for Financial Markets in Europe (AFME), and it might end up applying to tokenized securities as well.
The EU is making headway toward the blockchain and cryptocurrency sectors. The eurozone’s finance ministers recently convened in Brussels and issued a declaration about the implementation of the digital euro.
During Eurogroup meetings, the potential digital currency’s political ramifications are frequently discussed. Banks will be required to retain one euro of their own capital for every euro they hold in cryptocurrencies, according to Markus Ferber, a member of the European Parliament.
Additionally, the regulator emphasised that cryptocurrencies are “high-risk investments.” Ferber explained why such a policy was essential in detail, saying, that the hefty capital adequacy will aid in preventing the banking system’s volatility from spreading to the crypto realm.
In addition, the measure directs the European Commission to examine whether a specialized prudential approach for crypto assets would be necessary and to adopt, if suitable, a legislative proposal to this purpose.
The EU wants to increase its “strategic autonomy” in the capital markets since, after Brexit, a rival financial centre will be right outside its door.
