The Basel Committee wants to limit banks’ exposure to digital assets to just 1% of equity

The Basel Committee wants to limit banks’ exposure to digital assets to just 1% of equity

Thursday, The Basel Committee on Banking Supervision suggested, during its second consultation on the prudential treatment of exposures to crypto assets, that banks limit their exposure to so-called Group 2 crypto assets to just 1% of their Tier 1 capital.

Group 1 digital assets consist of traditional tokenized assets, such as synthetic shares, or those with effective stabilization mechanisms, such as regulated stablecoins. Under the new proposal, Group 1 digital assets would be subject to risk-based capital requirements at least equivalent to traditional capital assets within the current capital framework, Basel III.

However, cryptocurrencies that do not meet the above requirements will be classified as Group 2 digital assets, which would theoretically include the major non-stable and non-tokenized cryptocurrencies such as Bitcoin (BTC) and most altcoins. Therefore, banks could only commit 1% of their total wealth or net asset value in long or short positions in Group 2 assets.

Also, the Basel Committee is considering banks adopting a 1,250% risk premium for Group 2 digital assets. By comparison, stocks typically carry a 20% to 150% risk premium over their face values, depending on the company’s credit rating. Under the Basel III framework, a bank’s risk-weighted assets should not exceed 10.5% of its Tier 1 capital for prudent leverage.

The move is likely to severely limit banks’ ability to acquire volatile cryptocurrencies in the future, given that, for example, a bank would have to add $125 million worth of risk-weighted assets to its portfolio for every $10 million in Bitcoin purchased, which would make them much less lucrative than assets with lower risk-weight premiums. Basel III is an international regulatory agreement that almost all financial institutions in developed countries must comply with and is enforced by law.

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