The European Central Bank has told EU banks with crypto exposure to hold capital reserves according to crypto’s risk rating before crypto-related bills become law.
Banks Must Adhere to Draft Standards Until at Least 2025
The ECB says that member banks wishing to engage in crypto businesses before guidance from the Basel Committee on Banking Supervision (BCBS) becomes law must comply with its risk framework.
According to the central bank, these business ventures must align with the bank’s risk threshold, and corporate objectives decided upon by its board.
The new Basel standards incentivize EU banks only to hold so-called unbacked crypto assets worth 1% of their Tier 1 capital and asks them to include crypto in their stress test analyses.
Unbacked assets include stablecoins not backed by reserves, tokenized real-world assets, and private crypto assets like Bitcoin.
The Basel framework assigns unbacked crypto the highest risk score of 1250%, increasing the capital requirements for banks to do business with them.
The European Union and other Basel jurisdictions will codify the requirements of Basel’s prudential framework into law by Jan. 1, 2025. Until then, however, banks looking to branch out into crypto must adhere to the draft standards.
“The BCBS standard is not yet legally binding pending its transposition in the European Union. However, should banks wish to engage in this market, they are expected to comply with the standard and take it into account in their business and capital planning,” the ECB said.
The new Markets-in-Crypto-Assets bill defines crypto business lines that EU banks may engage in, amongst other things. Following a translation delay, the finalized draft of the bill will be available in Feb. 2023.
EU Launches Blockchain Sandbox to Link Innovators With Regulators
The European Commission recently launched the Blockchain Regulatory Sandbox on Feb. 14, 2023, to support banks’ experimentation with Distributed Ledger Technologies (DLT). Blockchains are a type of distributed ledger technology. The new sandbox will link technology innovators with regulators to ensure that new projects are legally compliant.
The projects will span multiple disciplines, including supply chains, credential verification, and finance. Up to 20 projects will be selected annually on the grounds of their business cases, legal relevance, and conformance with EU policies. Registrations for the first wave of projects will be open until Apr 14, 2023.
According to the ECB, several banks have already trialed DLT to improve efficiency, lower costs, and offer new products to customers.
On Jan. 31, 2023, the European Investment Bank issued a 50 million pound ($53 million) digital bond denominated in pound sterling on a permissioned blockchain.
While not a bank, German manufacturing giant Siemens recently launched a tokenized euro-denominated bond on the Polygon blockchain. According to Siemens, this kind of issuance eliminates central clearing and allows the firm to sell bonds to customers directly.
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