With the deferral of final votes on the EU proposals for Regulations on Markets in Crypto Assets (MiCA) and on Transfer of Funds (TFR) to April this year, a set of new banking rules were recently approved by the Economic and Monetary Affairs Committee of the European Parliament[i].

In alignment with Basel III Accord, the amendments would, among other things, oblige banks to apply a risk weight of 1,250% of capital to crypto-asset exposures, which is deemed as maximum possible level by international standards.  In simple terms, banks must in practice issue one euro of capital for every euro of crypto-asset held. In addition, a requirement for banks to disclose their exposure to crypto-assets and crypto-asset services as well as a specific description of their risk management policies related to crypto-assets is put forward.

Next to the introduction of the concept of “shadow banking” covering for instance investment funds and insurers, the updates also make reference to environmental, social and governance (ESG) risks with strengthened reporting and disclosure requirements.

Relevantly, the Basel Committee on Banking Supervision (BIS) also set forth a set of rules in December 2022[ii] to be implemented by January 2025, whereby two groups of crypto-assets are designed, based on a number of classification conditions, in order to determine minimum risk-based capital requirements concerning credit and market.

The classification conditions essentially relate to the nature of crypto-assets, issues of legal certainty, the reliability of the design of a given crypto-asset and its underlying network, alongside regulation and supervision of entities performing significant functions.

Here, distinction is made between tokenised traditional assets and crypto-assets with an effective stabilisation mechanism in place, as well as those crypto-assets that are unbacked.
In the case of crypto-assets that fail to meet any of the classification conditions, namely group 2, which are taken to pose additional and higher risks, “bank’s total exposure to these must not exceed 2% of the bank’s Tier 1 capital and should generally be lower than 1%.”

Lastly, with the test for assessing stablecoins with low risk profiles now taking the form of evaluating both the scope of redemption risks and the level of regulatory supervision, the BIS rules in general are seen to be of dynamic nature and would change in line with emerging developments.  

[i] See here https://www.europarl.europa.eu/news/en/press-room/20230123IPR68613/econ-committee-voted-to-finalise-reforms-of-banking-rules.

[ii] See here https://www.bis.org/bcbs/publ/d545.pdf.