By George Ward
In a new move toward regulatory compliance, EU banks dealing in digital assets are set to follow stricter guidelines proposed by the region’s lawmakers. After a Tuesday vote at the European Parliament committee, EU policymakers have decided on high-risks provisions for banks trading in cryptocurrency.
A New Amendment For Banks
According to a Reuters report on Monday, the EU Parliament pushed the proposed vote for banks to apply a risk measurement of 1,250% for exposure to crypto assets. In addition, the report revealed that lawmakers also passed a bill for financial capital requirements for traditional financial institutions.
This implies that once the new rule comes into effect (likely by 2025), banks will be required to cover their operations with capital reserves and will also be unable to gain leverage. Furthermore, the proposed percentage is reported to be the highest securitization level set up by the Basel III reforms developed by the Basel Committee on banking Supervision, the international banking standards body.
According to the draft of the bill, the European Commission will review whether further dedicated treatment of digital assets would be required before adoption. Also, it would decide if there will be an appropriate legislative proposal to back the current move.
The new policy is in anticipation of the international effort to limit the amount of crypto exposure by EU banks before the European Commission announces more rules. Markus Ferber, the spokesperson for the EU parliament’s central political body, explained that banks must hold a specific amount of Euro as their capital for every Euro they have in digital assets.
Ferber added that such an aggressive stance on the capital requirement would prevent the crypto industry’s volatility from spilling into the mainstream financial sector. The spokesperson noted that happenings in the crypto space over the past few years have shown how volatile virtual assets can be due to their status as high-risk investments.
Concerns Over Amendment’s Scope
However, a lobby group representing traditional finance organizations has raised fears over the new amendment’s scope, saying it is too broad. The group stressed that there is no clear definition of cryptocurrency in the legislation. Also, the requirement may be targeted at non-traditional crypto assets and tokenized securities.
As a result, the group calls for a quick address of the drafting issues on the new regulations. Before it is passed, the European Parliament must first approve the new rule.
Furthermore, it is subject to negotiation between finance ministers within the EU bloc who also participate in the EU council meeting. In addition, lobbying groups opined that the current rules need to be designed to reflect the existing realities of crypto assets.
According to them, the move is more urgent in light of the recent developments in the digital assets market. Meanwhile, the European Commission’s detailed legal proposal is expected to be ready by the end of 2024 to complement the upcoming Market in Crypto Asset (MiCA) regulation.
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