European Union stiffens rules for banks holding Cryptocurrency 

Legislators in the European Union recently agreed and conceded to enacting stricter policies on traditional financial institutions that hold cryptocurrencies. The Parliament’s Economic and Monetary Affairs Committee has reportedly tightened the capital requirement to hold digital assets.

According to Reuters, the European Parliament’s economic affairs committee authorized a draft law to enact Basel III capital rules from January 2025. However it backed several temporary divergences to give banks more time to adapt.

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A voting session was held on Tuesday, and European lawmakers voted and agreed to ensure banks holding cryptocurrencies adhere to more rigorous requirements. The Parliament’s Economic and Monetary Affairs Committee has allegedly stiffened capital measures to hold virtual assets. Other countries, like the United States, are following similar routes. In the provision of this draft law, the EU ushers in new parameters, one of which requires that banks hold enough worthwhile capital to cover their holdings of crypto assets in full.

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Markus Ferber, a centre-right German committee member, said, “Banks will be required to hold a euro of their own capital for every euro they hold in crypto.” Though this move is a provisional measure awaiting further EU legislation, it perfectly aligns with global banking regulators’ suggestions. “Such prohibitive capital requirements will help prevent instability in the crypto world from spilling over into the financial system,” Ferber said.

Why European Union lawmakers introduced further prohibitive measures

In the words of Markus Ferber, the draft law ensures banks will have to hold a euro of their capital for every euro they hold in cryptocurrency. He further explained that it is widely known that crypto assets are highly susceptible investments. It implies that the move will disclose unsupported assets like Bitcoin and Ethereum that the lenders can keep before the European Commission ratifies more guidelines.

Reuter reported that “one amendment states that banks would have to apply a risk-weighting of 1,250% of capital to crypto asset exposures, meaning enough to cover a complete loss in their value.”

The draft regulation does not define crypto assets, according to the industry group Association for Financial Markets in Europe (AFME), and it might also end up applying to tokenized securities. The draft bill has already received approval from EU member states, and parliamentarians will now negotiate a final decision with member states, with additional adjustments anticipated.

Foreign banks with branches in the EU will be closely monitoring the negotiations. While EU legislators on Tuesday adopted a tougher stance, EU states have adopted a more tolerant approach when foreign banks serving customers in the bloc should create a branch or transform a branch into a more heavily capitalized subsidiary. The EU wants to increase its “strategic autonomy” in the capital markets since, after Brexit, a rival financial centre will be right outside its door.

According to AFME, it will be critical to prevent a “substantial adverse impact” by restricting EU access to global markets and cross-border services. However, the final deal will become actionable in 2025 — three years from now.

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Across countries and continents, regulators are creating strict requirements that will guide cryptocurrency operations to protect users. Yesterday, South Africa’s Advertising Regulatory Board announced new guidelines, which indicated that equal demonstration of potential risks and profits must accompany crypto advertisements. Interestingly, the French National Assembly is set to organize a debate today centred around providing more strict rules for cryptocurrency firms.

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