EU lawmakers plan to cap banks’ crypto holdings

EU banks exposed to crypto might face caps and hefty capital requirements due to proposed amendments to a financial-services law published on August 17. Lawmakers of the European Green Party want to anticipate international standards by legislating heavy capital requirements for lenders.

The plans, presented by Green Party lawmaker Ville Niinistö, seek to anticipate capital norms currently being consulted on by international standard-setters, the Basel Committee on Banking Supervision.

According to these plans, put out in a document dated Aug. 11, crypto assets, which are deemed overly volatile or risky and known collectively as class 2, would have the most cautious possible rating. To put it simply, this means they will be unable to lend based on their virtual asset holdings.

“An institution’s total exposure to class 2 crypto-asset exposures must not be higher than 1% of the institution’s Tier 1 capital at all times,” said the proposal tabled by the Finnish Member of the European Parliament, imposing an absolute limit on how much crypto regulated lenders can hold.

Tier 1 capital represents the highest-quality capital in a bank’s reserves. Class 1 crypto assets, which are deemed less risky than class 2 and encompass regulated stablecoins and securities that use distributed ledger technology, would get more flexible capital requirements and no cap.

Changes to EU bank capital law were originally proposed by the European Commission in October 2021, to implement international norms set by Basel in 2017. Standard setters want banks to issue enough financial instruments to ensure they can safely lend without having to call on taxpayers in the event of a 2008-style economic crisis.

Originally, the EU planned to leave rules for banks’ crypto holdings until 2025, but since then, the bloc has agreed on its Markets in Crypto Assets Regulation (MiCA) to govern stablecoins and a further law to enable Web3 securities trades on a trial basis.

In June, the Basel Committee has also set out draft plans to regulate banks’ crypto holdings, which are very similar to Niinistö’s but are still under consultation.

Banking bosses from the largest financial institutions in the US and Europe have voiced their opposition to the cryptocurrency mandates handed down by the Basel Committee for Banking Supervision (BCBS), which proposes strict capital requirements for every dollar of Bitcoin owned. A forum of some of the largest US and European banks, including JPMorgan Chase and Deutsche Bank, has urged modifications to the rules proposed.

However, to pass into law, Niinistö’s plans yet need support from other lawmakers on the parliament’s Economic and Monetary Affairs Committee, scheduled to vote in December, and from governments of member states.

Also, the European Union is reportedly building a new regulator – “Anti-Money Laundering Authority” (AMLA) – that will direct oversee crypto businesses. Many negotiations remain before the AMLA launch, but all signs are that it’s underway.

While the crypto industry’s attention has been drawn to the Markets in Crypto Assets regulation and the controversial Transfer of Funds Regulation, these documents are part of a broader package of EU anti-money laundering (AML) policy that will have major implications for all financial institutions.