The European Union has taken a major step towards mainstream acceptance of cryptocurrency with a recent vote to allow banks to hold up to 2% of their capital in bitcoin and other digital assets.
The move, which was approved by the Economic Affairs Committee of the European Parliament on Tuesday, is part of the final stage of the post-financial crisis global bank capital rules known as Basel-III.
These rules, which are set to take effect in January 2025, will have a significant impact on the crypto sector and could pave the way for greater adoption of digital assets by traditional financial institutions.
Huge EU Shift
The decision to allow banks to hold a percentage of their capital in crypto marks a significant shift in the EU’s stance towards digital assets. Until now, the regulatory environment for crypto in the EU has been uncertain, with many countries struggling to put in place effective rules for the sector. This has led to a patchwork of regulations across the region, with some countries taking a more permissive approach while others have taken a more cautious stance.
The move by the EU to allow banks to hold crypto as part of their capital requirements is being seen as a positive step towards greater regulatory clarity and could encourage other countries to follow suit. The EU’s decision is also being seen as a sign of growing recognition of the potential of crypto as a viable asset class that can be used to diversify portfolios and reduce risk.
The banks will have to disclose their crypto holding and the risks associated with it, and will need to hold enough cash in their reserve to cover the potential crypto losses.
(BIS) Basel Committee’s Initial Crypto Warning
The European Union allowing banks to hold up to 2% of their capital in bitcoin and other cryptocurrencies is in contrast to warnings issued by the Bank for International Settlements (BIS) Basel Committee on Banking Supervision. The committee, which is made up of central bank governors from around the world, has previously issued warnings about the risks associated with cryptocurrencies.
In a statement released in December 2017, the committee warned that;
“crypto-assets do not meet the criteria for a currency” and that they “pose risks to banks’ safety and soundness”. The committee went on to say that “banks should avoid exposure to these assets until they have been adequately addressed”.
The committee’s concerns stemmed from the fact that cryptocurrencies are highly volatile and can be subject to sudden and large price swings. This volatility makes them a risky asset class for banks to hold and could potentially put depositors’ funds at risk. Additionally, many cryptocurrencies have been used for illicit activities such as money laundering and terrorist financing, which raises concerns about the potential for regulatory and reputational risks for banks.
Enhancing Regulatory Clarity
Despite these warnings, the Europe’s decision to allow banks to hold crypto as part of their capital requirements is being seen as a positive step towards greater regulatory clarity and could encourage other countries to follow suit.
However, it is important to note that while this move is a significant step forward for the crypto sector, there is still a long way to go before digital assets are fully integrated into the traditional financial system. Banks will have to disclose their crypto holding and the risks associated with it, and will need to hold enough cash in their reserve to cover the potential crypto losses.
In conclusion, the EU’s decision to allow banks to hold up to 2% of their capital in bitcoin and other digital assets is in contrast to the warnings issued by the BIS Basel Committee on Banking Supervision, which has previously warned about the risks associated with cryptocurrencies.
However, the EU’s move is being seen as a positive step towards greater regulatory clarity and mainstream acceptance of cryptocurrency. Banks should be aware of the risks and should disclose their crypto holding and the risks associated with it and will need to hold enough cash in their reserve to cover the potential crypto losses.
Article originally appeared In bitcoinist.com
Image reference from Unspash
