Banks must set aside enough capital to cover all Bitcoin losses, according to the Basel Committee on Banking Supervision.
According to the Basel Committee on Banking Supervision, which is made up of regulators from throughout the world, banks must set aside enough capital to cover any losses they may incur as a result of Bitcoin holdings in whole.
The move has been dubbed “conservative,” and it threatens to stymie Bitcoin’s extensive institutional adoption.
El Salvador just became the first country to adopt Bitcoin as legal tender, despite reservations about the cryptocurrency’s unpredictable pricing.
Basel RulesWhile bank exposure to crypto remains small, the Basel committee stated in a public consultation paper that ongoing growth of the crypto business could pose significant risks to financial stability if capital requirements are not imposed on banks.
For banks that are exposed to various types of assets, the Committee applies “risk weighting” restrictions. Basel has recommended two categories for Bitcoin and other cryptocurrencies.
The first category includes tokenized traditional assets as well as stablecoins such as Tether. These can be classified in the same way as bonds, loans, commodities, and equities are.
Traditional cryptocurrencies, such as Bitcoin, are included in the latter group. These crypto assets will now be subject to “conservative prudential treatment,” which means they will have a 1,250 percent risk weighting. In layman’s terms, this means that any bank holding Bitcoin or a similar crypto asset will be required to hold capital equal to their exposure. It means that a bank may be required to hold one US dollar in capital for every dollar worth of Bitcoin it holds.
In its study, Basel stated that “the capital will be sufficient to absorb a full write-off of the crypto asset exposures without exposing depositors and other senior creditors of the banks to a loss.”
Cryptocurrencies are notorious for their extreme volatility. Despite significant institutional investment over the last year, Bitcoin has risen from around $11,000 in August to almost $63,000, its all-time high. It has now dropped to $38,000.