- Efforts have been made to ease restrictions on crypto holdings as part of broader banking reforms.
- Lawmakers have sought to prevent potential crypto turmoil from impacting the commercial banking system.
- Proposed risk weight adjustments for stablecoins and tokenized assets have aimed for a balanced regulatory approach.
The European Commission aims to facilitate commercial lenders’ inclusion of stablecoins and tokenized assets, countering efforts by lawmakers to discourage crypto holdings as part of broader banking reforms.
EU Seeks to Prevent Crypto Turmoil from Affecting Banks
A leaked document has revealed the Commission’s intent to moderate the European Parliament’s strict stance, which called for banks to hold one euro of capital for every euro of crypto.
Lawmakers from the European Union (EU) seek to prevent crypto turmoil from affecting commercial banking by imposing a 1,250% risk weight on digital assets, creating a maximum capital requirement for lenders.
The Commission’s proposal, following an April 18 meeting among negotiators, suggests lowering the risk weight to 250% for stablecoins tied to non-fiat assets like gold. Tokenized assets and stablecoins backed by fiat currencies would be treated similarly unless additional credit or market risks exist.
This aligns with the forthcoming Markets in Crypto Assets regulation (MiCA), effective July 2024, which regulates stablecoin issuers and mandates appropriate reserves.
EU Commission Moves Toward Crypto-Asset Regulations
The leaked document warns of increased risks to financial stability if a regulatory framework isn’t established to address risks from exposure to crypto-assets. Banks could face amplified risks due to the transmission channels between the crypto-asset and financial markets.
The proposal requires supervisors to ensure banks properly manage risks associated with holding cryptocurrencies, such as cybersecurity, money laundering, and valuation issues.
Bitcoin (BTC) and Ethereum (ETH) would still carry the maximum risk weight of 1,250%. This cautious approach has raised concerns in the traditional finance sector.
The proposals anticipate detailed crypto standards from the Basel Committee on Banking Supervision. The Commission plans to finalize a more comprehensive strategy after 2023, once global standards are in place.
The proposals must be reconciled with the EU member states’ text to become law, typically through closed-door negotiations facilitated by the Commission.
On the Flipside
- Easing access to stablecoins and tokenized assets for commercial lenders may expose the banking system to increased risks associated with cryptocurrencies’ volatile and relatively unregulated nature.
- Lowering the risk weight for stablecoins tied to non-fiat assets might undermine the financial system’s stability, as the value of such assets can be subject to significant fluctuations.
- Traditional finance sector representatives caution that the conservative regulatory approach towards cryptocurrencies could impede innovation and hinder the growth of crypto-related business activities in the short term.
Why This Matters
The leaked proposal, if implemented, could enhance the accessibility and acceptance of digital assets within the traditional banking system, fostering increased integration and potentially fueling further growth and adoption of cryptocurrencies.
To learn more about how Tether strengthens its stablecoin reserves through BTC investment, read here:
Tether Strengthens Stablecoin Reserves with BTC Investment
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