Banks Will Need Substantial Capital to Hold Bitcoin

The Basel Committee on Banking Supervision has revealed that banks would need to fulfill a huge capital requirement if they intend to hold Bitcoin or other cryptocurrencies.

The Basel Committee on Banking Supervision has proposed that banks can hold Bitcoin and other cryptocurrencies. However, they will need to satisfy some tough capital requirements if they intend to do so.

The committee, which is comprised of the Federal Reserve, the European Central Bank and some other leading central banks, proposed this measure yesterday. The proposal came following the rising interest in Bitcoin by traditional banks and financial institutions in recent months.

In its report, the committee said the growth of cryptocurrencies and related services has the potential to increase the financial stability concerns and amplify the risks faced by banks. “The capital will be sufficient to absorb a full write-off of the crypto asset exposures without exposing depositors and other senior creditors of the banks to a loss,” they added.

Hence, the committee proposed a 1,250% risk weight attached to a bank’s exposure to Bitcoin and other crypto assets. Thus, banks would be required to hold a dollar in capital for every dollar’s worth of bitcoin, based on an 8% minimum capital requirement.

The capital requirement only applies to cryptocurrencies and other highly volatile digital assets. The committee said it doesn’t affect digital assets like stablecoins, since their values are tied to real-world currencies and assets like the US Dollar.

According to the committee’s findings, the regulation is needed due to the increasing risks posed to banks by cryptocurrencies due to concerns over money laundering, volatile prices and reputation challenges that could lead to defaults.

With the proposal now finalised, the public can comment on it before it is implemented. However, the committee acknowledged the evolving cryptocurrency market and added that the policies would undergo several changes as the market progresses.

The cryptocurrency market has welcomed numerous banks over the past year. Goldman Sachs, Morgan Stanley, BNY Mellon and JPMorgan are some of the banks involved in the crypto market in varying capacities.