Basel Committee Sets Crypto Exposure Rules for Banking Firms

Basel Committee, the international banking committee, has recently announced the completion of crypto investment policies for banking firms.

The committee started its journey last year in July and marked the event as completed this year in the same month. The members of the committee are planning to arrange a meeting on the 2nd and 3rd July to discuss policies and address issues regarding bank investments in digital assets.

Basel Committee Policies on Crypto

The policies designed by Basel III started to take shape in 2019 as a way to expand upon the resilience of European Union banking firms via regulatory reforms, supervision, and risk management strategies.

An insight into this regulatory framework for banking firms on the subject of cryptocurrency investment was first pitched in December 2022. The committee members invited feedback from member nations and central banks in May 2023.

This legislative framework is inclusive of specified amendments to the first proposal and setting standards for stablecoin issuers. The focus and mission of the Basel Committee is to incorporate an environment to regulatory compliance and transparency for investors as a way to encourage standardized market practices. These up-scaled standards are to be published in July as per the Bank of International Settlements (BIS).   

Basel Committee Directs Banks to Place Crypto in Group 2 Risk Assets

The Basel Committee started working on the matter of crypto investments and holdings for banking firms in 2019. Therefore, in 2021, the committee directed banking firms to place digital investments in Group 2 risk assets that are classified as high-risk investments.

On this account, the banking firms were directed to maintain capital reserves in equal quantities as their crypto holdings. As a Group 2 asset, crypto has a risk assessment of 1,250%.

Furthermore, the Group 2 holdings have been limited to 1% of investment allowance based on Group 1 reserve. The committee also assigned b1 class to stablecoins that does not require banking firms to harbor massive reserves in addition to its Group 1 holdings. At the same time, stablecoins with an unstable constitution have been placed in Group 2.

The industry participants viewed this restriction as a limitation. During the last month of last year, the committee also placed a maximum maturity limit for bank-reserved assets and over-collateralized stablecoin holdings to tackle probable de-pegging.

All the while, the committee has talked about the various instances of stablecoin issuance. It concluded with the statement that associated risks highlighted by the Basel outline have been included in the assessment report. 

However, the committee has also talked about an aim to keep monitoring the area. In accordance with the latest Basel standards, stablecoin publishers are required to comply with the Markets in Crypto-Assets regulations. The standards of Basel III are said to go live in 1st January 2026 after an extension from Jan 1st, 2025.

Crypto Bank Custody

The Federal Deposit Insurance Corporation (FDIC) nominee for chairperson, namely Goldsmith Romero, recently addressed the matter of bank custody of cryptocurrencies. She was testifying in front of Congress when she talked about the lapse of a chance to overturn SAB-121.

In response to an inquiry from Senator Cynthia Lummis, Romero stated that cryptocurrencies are a business just like any other.

She further stated that it was not part of FDIC’s duty to direct banks about which asses they can reserve. In the context of upcoming Presidential elections In the United States, cryptocurrencies have become a widely debated topic.

A considerable amount of legislative movement is taking place in the country. At a contemporary stage, there are crypto positive political movements such as Stand with Crypto and The Bitcoin Voter project.

On the other side, there are also judicial changes such as the Supreme Court’s decision to overturn 40-year legal precedent namely Chevron USA Inc. versus Natural Resources Defense Council. This law allowed federal regulators to design and implement policies without interference by Congress.