Basel Committee Approves Implementation of Global Cryptocurrency Banking Regulations by 2025
The Basel Committee on Banking Supervision (BCBS) released its comprehensive global regulatory guidelines for banking institutions to mitigate the risks associated with cryptocurrencies.
by Juan Aranovich, researcher at Sino Global Capital
Summary
The Basel Committee on Banking Supervision (BCBS) has released its global cryptocurrency banking regulations, which must be implemented by Jan. 1, 2025. The announcement is an attempt to develop a global regulatory baseline for mitigating risks to banks from cryptoassets.
The rules suggest a bank's exposure to certain tokenized traditional assets, non-fungible tokens, stablecoins and unbacked crypto assets should not exceed 2% and should generally be lower than 1%. Assets that meet the criteria are subject to capital requirements based on the existing Basel Framework.
Previously, crypto holdings were capped at 1% of Tier 1 capital, which is the core measure of a bank's financial strength from a regulator's point of view and is considered the most reliable source of funds when compared to other forms of capital such as subordinated debt or intangible assets. Given this cap, CME had estimated that a maximum of $20 billion of crypto could be held by member firms.
What Is the BCBS and Basel III
The Basel Committee on Banking Supervision (BCBS) is an international organization that promotes global banking standards and works to ensure a safe and stable financial system.
Their most recent set of measures is Basel III, created in response to the 2007-09 financial crisis. It is designed to strengthen the regulation, supervision, and risk management of banks worldwide, with each member country committing to implementing and applying the standard within the agreed-upon time frame.
Relevance for Crypto
The move to ease the hard cap from 1% to 2% of Tier 1 capital and provide clarity on tokenized assets is a significant step forward for the crypto asset market, allowing banks to double their holdings of cryptocurrencies up to $40 billion, as per the CME's estimate.
Basel III establishes the amount of regulatory capital that must be allocated to all assets, including cryptocurrencies. By treating cryptocurrencies more favorably - i.e. requiring less regulatory capital to be set aside - more crypto banks are likely to carry these assets on their books.
Structure
The BCBS, which sets capital requirements in the Basel framework, advised that digital assets be separated into two groups (this guidance was finalized from a June BCBS report):
Group 1 - Fully backed instruments, like tokenized stock or fiat-backed stablecoins.
Group 2 - Unbacked instruments, like Bitcoin and Ethereum.
Conclusion
The increasing approval of tokenized assets and the recognition that they should be categorized according to their fundamental asset (i.e. a tokenized share of Apple stock should be treated similarly to a normal share of Apple stock) is an important step for the industry. Nevertheless, crypto assets still face the highest regulatory capital requirements and this is unlikely to change in the near future.