Lawmakers in the European Union have approved a number of modifications, including harsher new guidelines for banks dealing with cryptocurrencies and digital assets.
The decision to implement these limitations was made by the Economic and Monetary Affairs Committee of the European Parliament.
This action was taken to restrict the number of unbacked loans made using Ethereum (ETH) and Bitcoin (BTC) that lenders might keep before the European Commission. Banks must retain additional capital to safeguard consumers against cryptocurrency losses due to cross-party hacks.
The Act will put into force the Basel III International Regulatory Framework’s remaining parts. The Basel Committee on Banking Supervision created Basel III, a set of regulations that have gained international acclaim.
The Basel III component would improve the financial framework by approving strict capital requirements. These regulations were enacted explicitly with the intention of requiring banks to declare whether and how they are exposed to cryptocurrencies.
For this legislation to become law, the new regulations must have the blessing of the European Parliament and the EU Finance Ministers.
EU to monitor Bank for the Crypto Assets
According to the proposed amendment, banks must give exposures to crypto-assets a risk-weighting of 1,250%. This measure covers the financial capital requirements for conventional institutions. This modification mandates that the banks be in charge of covering their whole capital reserves and refrain from taking on leverage when the regulations take effect.
The committee’s suggested percentage of securitization represents the greatest level ever incorporated in Basel III rules.
The committee has established guidelines that must be followed by the start of 2025 about how much capital a bank may expose to crypto assets.
In a statement, Markus Ferber, the economic spokesman for the largest political party in the parliament, stated:
Banks will be required to hold a euro of their own capital for every euro they hold in crypto. Such prohibitive capital requirements will help prevent instability in the crypto world from spilling over into the financial system. Over the past couple of years, we have seen that crypto assets are high-risk investments.
Caroline Liesegang, Head of Prudential Regulation at the Association for Financial Markets in Europe (AFME), stated:
The Parliament has made positive steps forward via changes to the Commission’s legislative proposal which should be given due consideration during interinstitutional negotiations.
The Association of Financial Markets in Europe (AFME) is a lobby group that mainly acts for traditional financial organizations like investment banks with different opinions. They have concerns that this scope of amendment might be too broad.
AFME mentioned in an email:
There is no definition of crypto assets in the [legislation] and therefore the requirement may apply to tokenized securities, as well as the non-traditional crypto assets the interim treatment is targeted at.
The organization has said that the drafting issues can be handled better later in the legislative process.