Until December 2024, European banks may be legally forced to back their token holdings with heavy capital requirements.

A legal draft has been published detailing new EU rules for banks holding cryptocurrencies, and are set for parliamentary approval.

If the draft passes, banks in the EU would be required to give all their crypto asset exposures a proposed risk weight of 1,250% until December 2024 – which will force them to hold an equal amount of capital matching the crypto that they hold.

Under the draft, digital assets are to be assigned under the highest possible risk rating.

In the long term, banks may have to follow a larger set of new guidelines, published just in December 2022 from the Basel Committee on Banking Supervision (BCBS). These new rules will be enforced from January 2025 onwards.

The EU is preparing to set standards for crypto regulatory efforts. Its latest announcement states that the Committee is scheduled to adopt a legislative proposal by December 31st 2024, and will be integrating elements from BCBS standards into EU law for the long term.

The EU’s proposed capital requirements for crypto

The capital requirements proposed state that for each crypto asset, different rules would apply.

For prominent cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), the Basel Committee would consider them ‘Group 2 cryptoassets’, following the guidelines in the document.

According to the document, Group 1 cryptoassets refers to assets that fully meet classification conditions, including tokenised traditional assets, and “cryptoassets with effective stabilisation mechanisms.”

Group 2 cryptoassets is a classification condition given to assets that don’t meet the conditions for Group 1 assets. In the document, the Basel Committee refers to such assets as posing “additional and higher risks compared with Group 1 cryptoassets and consequently are subject to a newly prescribed conservative capital treatment.” Included in the Group 2 category are unbacked cryptoassets.

Group 2 assets are also subdivided into two groups by the Basel Committee: Group 2 A – which describes assets that cover crypto holdings made by ETFs or other derivatives that are able to be traded on regulated public markets, and Group 2 B – where they are not.

While Group 2 A assets will be subject to lower requirements, Group 2 B assets are to be given a proposed risk weight of 1,250%.

The Committee also proposes under the new guidelines that a bank’s total exposure to Group 2 cryptoassets must not exceed 2% of the bank’s capital, and advises that the amount should generally be lower than 1%.

In considering these new requirements, the EU Commission has hinted on how there is a necessity to respond to “recent adverse developments in the crypto-assets markets”, as “existing prudential rules are not designed to adequately capture the risks inherent to crypto-assets.”