EU Proposal Aims to Lower Risk Weight for Stablecoins, Tokenized Assets
• The European Commission aims to facilitate commercial lenders’ inclusion of stablecoins and tokenized assets, countering efforts by lawmakers to discourage crypto holdings as part of broader banking reforms.
• A leaked document has revealed the Commission’s intent to moderate the European Parliament’s strict stance, which called for banks to hold one euro of capital for every euro of crypto.
• The proposal requires supervisors to ensure banks properly manage risks associated with holding cryptocurrencies, such as cybersecurity, money laundering, and valuation issues.
EU Proposal Seeks To Lower Risk Weight For Stablecoins
The European Commission is seeking to balance regulations on crypto holdings as part of broader banking reforms. Lawmakers are aiming to prevent potential crypto turmoil from impacting the commercial banking system by proposing risk weight adjustments for stablecoins and tokenized assets. This would be done by lowering the risk weight from 1,250% down to 250% for non-fiat backed assets like gold. Tokenized assets and stablecoins backed by fiat currencies would be treated similarly unless additional credit or market risks exist.
Leaked Document Reveals Regulatory Intentions
A leaked document from the Commission has revealed their intentions in moderating the European Parliament’s strict stance on bank capital requirements for crypto holdings. Banks could face amplified risks due to potential transmission channels between crypto-assets and financial markets. This prompted the need for a regulatory framework that addresses these risks such as cybersecurity, money laundering, and valuation issues. The proposals must also be reconciled with forthcoming Markets in Crypto Assets (MiCA) regulation effective July 2024 which regulates stablecoin issuers and mandates appropriate reserves.
Impact On Bitcoin And Ethereum
The proposals anticipate detailed standards from the Basel Committee on Banking Supervision with Bitcoin (BTC) and Ethereum (ETH) still carrying a maximum risk weight of 1,250%. This cautious approach has caused concerns in traditional finance sectors prompting further research into a comprehensive strategy once global standards are in place after 2023.
Risks Of Exposure To Crypto-Assets
The document warns of increased risks to financial stability if an appropriate regulatory framework isn’t established addressing exposure to crypto-assets specifically addressing cybersecurity, money laundering, and valuation issues posed by banks holding cryptocurrencies in their portfolios.
Global Standardization Expected After 2023
The EU Commission plans on finalizing a more comprehensive strategy once global standards are in place after 2023 through detailed standards set forth by the Basel Committee on Banking Supervision as well as adherence to Markets In Crypto Assets (MICA) regulation starting July 2024 that regulate stablecoin issuers while mandating appropriate reserves
