Banking Regulators Propose 100% Backing for Banks that Hold Bitcoin

The Basel Committee on Banking Supervision (BCBS) has proposed a new approach to address capital requirements from banks that hold cryptocurrencies and other kinds of digital assets for customers.

In a newly published consultation paper, the Swiss-based regulatory body, which consists of bank supervisory authorities, recommended a two-pronged approach for banks that decide to dip their toes into the emerging industry.

Before now, BCBS requires that banks use “risk weightings” to evaluate capital requirements for assets that they custody. The riskier an asset is, the higher the assigned risk weighting, potentially requiring that the bank holds substantial amounts to cover any future losses.

In the new paper, BCBS first recommends that stablecoins and other kinds of tokenized digital assets come under the same category as traditional assets such as bonds, equities, and commodities. This approach means that they could have a risk weighting anywhere between 0% to 1250%, depending on the value of assets used to back the stablecoin or token.

The second classification involves Bitcoin and other highly volatile cryptocurrencies whose value is not linked to any underlying assets. The regulator noted that given their “unique risks” banks should adopt “conservative prudential treatment” and place a 1250% risk weighting on these assets.

Such an approach would require that banks with exposure to Bitcoin must hold capital that is equal in value to their original investment. The regulator also applies the same rules when banks invest in funds or other high-risk securities.

Regarding the need for such full backing, BCBS reckoned.

The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss.

BCBS further said that because of the rapidly evolving nature of the crypto market, it will undertake further public consultation before publishing the new rules.

Many banks globally are already warming up to cryptocurrencies, making the recent move by BCBS not entirely surprising. Since the turn of the year, US banking giants such as Goldman Sachs, BNY Mellon, and JP Morgan have all announced the impending launch of crypto-related investment products.