A policy allowing banks to hold 2% of their reserves in cryptocurrencies was recently introduced by the BIS in its Prudential Treatment of Cryptoasset Exposure report for December 2022.
Banks to Hold 1% Maximum
The policy, which covers a number of aspects of how crypto assets are to be classified and handled, is scheduled to go into effect on January 1st, 2025. It is the second consultation on a policy that was issued earlier in the year.
The BIS indicated that banks would be restricted to holding no more than 1% of their reserves in cryptocurrencies in the original version of this study, which was issued in June.
The policy divides digital currency across two cohorts. Traditional assets that have been tokenized and digital assets with “effective stability mechanisms” are referred to as Group 1. Digital assets that “fail to meet any of the classification conditions of Group 1 assets” are categorized as Group 2 assets.
Group 2 Asset Regulations
The BIS is now implementing its new regulations for Group 2 assets. According to the BIS, Group 2 assets, such as Bitcoin, present a bigger risk to financial systems since they lack a distinguishable counterparty.
The paper stipulates that a bank’s exposure to Group 2 crypto assets should not amount to more than 2% of the bank’s Tier 1 capital, within reserves. The study explained that Group 2 financial instruments need new policy because they cannot yet be accommodated by BIS norms.
“Certain crypto assets have exhibited a high degree of volatility, and could present risks for banks as exposures increase, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering/terrorist financing risk; and legal and reputation risks”.
Regulation Welcome and Necessary
The BIS paper also states that as the market for digital assets grows, so do associated risks. As a result, despite the market’s tiny size in comparison to the global market, regulation is necessary. The study describes the risks and oversight of Group 2 assets in detail.
The rule proposed by the BIS continues in line with the generally cautious approach to regulation that regulators have taken thus far in this area. Despite the fact that this policy is a little conservative, it is positive for the adoption of Bitcoin and the rest of the crypto asset market. With the adoption of this new regulation, banks will have more information about how to become exposed to cryptocurrencies when the rule is implemented across all BIS jurisdictions in 2025.
This news comes at a time when the digital currency sector is suffering from high volatility. Signature Bank, a major US financial institution, announced that it would be reducing its stake in crypto this month citing volatility concerns. Eric Howell, the bank’s Chief Operating Officer made it clear that Signature would remove between $8 and $10 billion of deposits from the volatile market by reducing its exposure to cryptocurrencies.
This move by signature came before news of cryptocurrency companies laying off employees, limiting withdrawals, and seeking to stop losses; this raised concerns about the ecosystem’s health. These concerns still persist as investors maintain a watchful eye.
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