Basel Committee: Banks Should Adopt a 1250% Risk Weight for Bitcoin

If banks hold cryptocurrency exposures, how should their risk level be measured?

Basel Committee: Banks Should Adopt a 1250% Risk Weight for Bitcoin

If banks have cryptocurrency exposures, how should they measure their risk level?

On June 10, the Basel Committee on Banking Supervision (BCBS) issued a public consultation on its initial proposals for the prudent treatment of banks’ crypto asset exposures. The draft suggests that banks should apply a risk weight of 1,250 percent to their exposures to bitcoin and other cryptocurrencies.

In practice, that means banks may need to hold one dollar’s worth of capital for one dollar’s worth of bitcoin under an 8% minimum capital requirement, Bloomberg reports.

The Basel Committee, which includes the Federal Reserve and the European Central Bank, said in the report that “the growth of crypto assets and related services has the potential to raise financial stability concerns and increase the risks faced by banks.” A risk weight of 1250% would be sufficient to absorb the exposure from a full write-off of crypto assets, thereby avoiding losses to depositors and other senior creditors of the bank.

According to the comment draft, crypto assets are defined as private digital assets that rely primarily on cryptography and distributed ledgers or similar technologies. And to clarify the minimum risk-based capital requirements for credit and market risk, crypto assets are screened and divided into two groups.

The first group of crypto assets includes tokenized traditional assets and crypto assets with effective stabilization mechanisms, such as stablecoins. Such crypto assets would be subject to at least equivalent risk-based capital requirements based on the risk weights of the underlying exposures as specified in the existing Basel capital framework.

A second group of crypto assets, including, for example, bitcoin, would pose additional and higher risks and would therefore be subject to a new prudential capital constraint and should be subject to a risk weight of 1250%.

The draft opinion divides crypto assets into two groups, with bitcoin belonging to the second group of assets and a proposed risk weight of 1,250 percent

Since 2020, banks have gradually begun to lay out the cryptocurrency market as the bitcoin bull market has taken hold. For example, Bank of New York Mellon, the oldest bank in the U.S., declared on Feb. 11 that it would enter Bitcoin and other digital currencies. Also on March 17, CNBC reported that Morgan Stanley will open access to three bitcoin funds to offer bitcoin fund investments to affluent users.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/basel-committee-banks-should-adopt-a-1250-risk-weight-for-bitcoin/
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