European lawmakers voted on Tuesday that banks must fully cover crypto holdings with capital.
European banks holding cryptocurrency will have to follow more stringent measures. The Parliament’s Economic and Monetary Affairs Committee will be voting today, January 24, on the final set of proposed amendments intended to bring European Union bank capital rules in line with international regulations.
The proposal text requests the European Commission to propose a bill by June 2023, making banks apply a 1,250% risk weight to crypto exposures until the end of 2024. Under global banking rules established by the Basel Committee on Banking Supervision, that is the maximum acceptable level of risk.
In practice, however, this is drastic, as banks would have to issue one euro of capital for each euro-value of crypto held, without possibility of gaining any leverage.
“The existing prudential rules are not designed to adequately capture the risks inherent to cryptoassets. This is even more urgent in light of the recent adverse developments in cryptoasset markets.”
This text accompanies the proposed law, referencing the implosion of FTX, the collapse of cryptocurrencies Luna And TerraUSD, and the bankruptcies of digital assets firms BlockFi, Celsius Network, Genesis, Three Arrows Capital (3AC), and Voyager Digital.
Markus Ferber, a member of the European parliament, says of the proposed law that “such prohibitive capital requirements will help prevent instability in the crypto world from spilling over into the financial system.”
Unfortunately, the law means that lenders will be limited in the number of unbacked assets like Bitcoin and Ethereum that they can hold.
Firmer regulations are being drafted across multiple countries and government branches. The French National Assembly will also be meeting today to discuss a strict license regime crypto firms will have to abide by in the coming year. South Africa’s Regulatory Board has also just announced new guidelines for digital asset advertisement.
Improved regulations should focus on centralized cryptocurrency companies, like exchanges and asset management firms, so as to avoid more scamming of clients seeking decentralized solutions.