In its ongoing pursuit of clear regulations for the cryptocurrency sector, the European Union has taken significant steps. While the final vote on the European Union’s proposed cryptocurrency regulatory framework, known as the Markets in Crypto-Assets Regulation (MiCA), was delayed to April 2023 due to technical issues, the European Parliament recently approved fresh banking regulations.
According to a report from Reuters, the Economic Affairs Committee of the European Parliament granted its approval to a bill on Tuesday that outlines the implementation of the final phase of the global bank capital rules (Basel-III), which were developed following the financial crisis. The rules are set to come into effect starting January 2025 and classify volatile cryptocurrencies like Bitcoin as high-risk investments.
The European Union’s approach mirrors that of the Bank for International Settlements (BIS), which categorizes cryptocurrencies into two distinct groups. Group 1 comprises tokenized assets and stablecoins with approved stabilization mechanisms, while there are doubts about whether Tether or USDC meet these requirements.
Group 2 encompasses stablecoins lacking BIS-approved stabilization mechanisms and volatile cryptocurrencies. This classification mandates that cryptocurrencies such as Bitcoin and Ethereum be assigned a “risk weight” of 1,250% by banks.
Consequently, European banks will be required to maintain more than one euro of available capital for every euro invested in cryptocurrencies. Markus Ferber, a German representative in the European People’s Party within the EU Parliament, explained that this effort aims to prevent potential instability within the cryptocurrency realm from affecting the broader financial system.
EU Banks Granted Permission to Allocate 2% of Capital to Bitcoin and Cryptocurrencies
Additionally, the new directive allows banks to invest up to 2% of their capital in cryptocurrencies like Bitcoin, with the European Parliament’s economic committee also introducing temporary exemptions to provide banks with extra time for adjustment.
Last year, the BIS Basel Committee cautioned against the use of cryptocurrencies and advised banks to limit their exposure to these assets to a maximum of 1% of their total holdings.
The recently approved guidelines are based on a draft that the Basel Committee on Banking Supervision finalized on December 16. This committee consists of numerous central banks and banking regulators that, while lacking legislative authority, establish standards for the prudent regulation of banks.
As Ferber highlighted, the recent turbulence in the cryptocurrency market serves as further evidence in favor of these regulations. Other countries, including the United States and the United Kingdom, are also pursuing similar measures, but the European Union stands out by stipulating that banks must maintain adequate capital to fully cover their cryptocurrency holdings.
It’s important to note that the approval from the European Parliament’s Economic Affairs Committee marks the initial step in the approval process. The directive must still receive endorsement from the entire European Parliament in July before being presented to national finance ministers within the Council of the European Union to become enforceable regulations.
While these regulations might initially appear restrictive, it’s crucial to emphasize that the BIS and the EU’s objective is not to ban cryptocurrencies for European banks but rather to establish limits and ensure capital coverage.
Curious about Bitcoin?
How about mining this new and asymmetric asset?
Find out how it works.
Book your edge now!
www.rollmanmining.com
