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New EU Banking Regulation Assigns Highest Risk Score to Crypto

2 mins
Updated by Ryan Boltman
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In Brief

  • EU regulators want banks to hold capital 100% capital reserves for all crypto exposure until December 2024.
  • The new bill also compels banks to disclose their crypto exposures and define business lines according to the soon-to-voted-on MiCA bill.
  • U.S. Banking Regulators want to prevent what they deem to be outsized crypto risks from entering the banking sector without explicit risk profiles.
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A new banking draft bill by EU lawmakers proposes that banks assign cryptocurrencies the highest risk weight of 1250% until Dec. 2024.

Banks in the European Union must also disclose the business operations and risk frameworks related to each crypto exposure.

EU Banking Bill Depends on MiCA Outcome

According to the draft, banks also need to hold minimum capital reserves commensurate with risks related to each crypto exposure. They must maintain 100% capital requirements for all crypto exposures until Dec. 2024.

Crypto’s higher risk rating conforms with capital requirements for risk-weighted assets according to the Basel Committee on Banking Supervision’s Basel III reforms. Banks must keep capital according to the higher amount yielded from internal and standardized risk assessments. The 1250% rating is the upper limit of capital required for certain risk-weighted assets in the standardized risk framework.

The EU’s Council and Parliament must vote on the draft for it to become law across the EU’s member states.

The new draft banking legislation piggybacks off the forthcoming Markets-in-Crypto Assets legislation scheduled for voting in the European Parliament at the end of April 2023.

The new bill regulates the issuance and trading of crypto assets and requires miners to disclose their energy consumption. New crypto projects will need to delineate their project’s risks in a mandatory white paper.

Lawmakers finalized the new regulations in Oct. 2022, but the burden of translating the document into the 24 languages of the EU bloc delayed its release.

US Banking Regulators Tighten Noose Around Crypto

The relationships between crypto companies and banking institutions have come under increasing regulatory scrutiny amid recent SEC enforcement actions and the general anti-crypto sentiment advanced by several U.S. regulators.

The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation said they would closely monitor U.S. banks with crypto exposure and look to prevent crypto’s outsized risks from entering the U.S. banking sector.

Unlike the EU draft bill, their report did not offer specific risk exposures and their associated capital requirements.

In the wake of a joint report released by the regulators in early Jan. 2023, Metropolitan Bank shut down its crypto vertical, while Signature Bank limited USD transfers for Binance customers to $100,000 or more. The British Virgin Islands quant trading firm Statistica Capital recently announced a putative class-action lawsuit against Signature for its alleged knowledge of the commingling of funds between customers of collapsed exchange FTX and its sister hedge fund Alameda Research.

Silvergate Capital, another traditional financial institution, was recently the target of a probe by U.S. prosecutors for its dealings with FTX and Alameda. FTX’s former CEO, Sam Bankman-Fried, faces allegations of wire fraud and other crimes related to the mismanagement of customer funds.

Banks Involved in New Choke-Point

Crypto venture capitalist Nic Carter recently likened the marginalization of crypto by U.S. banks to an Obama-era program called Operation Choke-Point.

The program deprived politically polarizing but legally-compliant industries of access to the banking sector. President Joe Biden’s Acting Comptroller of the Currency undid his predecessor’s efforts to limit political interference in the banking sector. Presently, banks ascribe higher risks to industries certain to attract government opposition, Carter argues.

And recent regulatory resistance suggests that crypto may be viewed as such.

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...