The Basel Committee, the international body for setting standards for prudential regulation related to banks, on Thursday, put forth a suggestion on how banks could deal with crypto-assets.
According to the BCBS or the Basel Committee on Banking Supervision, banks could maintain just 1% of equity on their exposure to Group 2 crypto-assets.
This suggestion on limiting digital asset exposure of banks to 1% was put forth during the Committee’s second consultation on prudential regulation of crypto-assets.
What are Group 2 Crypto-Assets?
To understand Group 2 assets, it is important to understand Group 1 crypto-assets. Crypto-assets of Group 1 comprise traditional assets that have been tokenized. It means that these traditional assets have digital tokens representing them on the blockchain.
Some examples of Group 1 members include synthetic stocks. Group 1 can also consist of assets that have a defined form of stabilization- regulated stablecoins are an example.
According to the Committee’s current proposal, digital assets belonging to Group 1 would see risk-based capital requirements either equal to, or more than, that of traditional capital assets. The capital requirements mentioned here are as currently specified for traditional assets under Basel III.
Basel III is a global regulatory structure defined by the BCBS. The purpose of Basel III is to create stronger capital requirements for banks and lower their risks. The framework safeguards international banking through reforms and regulations.
Basel III regulations require banks to maintain specific leverage ratios and preserve a specified level of reserve capital for risk mitigation.
Group 2 digital assets would comprise crypto-assets that do not fulfil Group 1 requirements. This definition would then include non-stabilized assets, and cryptocurrencies that have not been tokenized such as Bitcoin (BTC) and a majority of Altcoins.
Given the current proposal, banks would be able to allocate only 1% of Tier 1 Capital or core capital, for Group 2 digital assets.
Basel Committee Seeks More Crypto-Asset Regulation
The BCBS also proposes that banks levy a 1, 250% risk premium for digital assets belonging to Group 2. It should be noted that there is a risk premium ranging from 20% to 150% on stocks, in comparison. The risk premium attached is also governed by the credit rating of the subject company.
According to the Basel III framework, banks must ensure that their risk-weighted assets do not cross 10.5% of the bank’s core capital (Tier 1 capital) to maintain prudential leverage.
This proposal by the Basel Committee is more likely to put serious limits on a bank’s cryptocurrency buying ability. The move proposed by the Committee would make cryptocurrencies less profitable compared with assets carrying lower risk-weight premiums.