European Union lawmakers have agreed to a number of changes, including stricter new requirements for banks dealing in crypto and digital assets.
The Economic and Monetary Affairs Committee of the European Parliament has voted on the matter that will implement the ban.
This step was taken to limit the amount of loans that are not backed by Bitcoin (BTC) and Ethereum (ETH) that can be purchased in front of the European Commission. Cross-party compromises will require banks to hold more capital to protect customers from crypto losses.
The Act will implement other important components of the Basel III International Regulatory Framework. Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision.
The Basel III component will strengthen the financial framework by agreeing to solid capital requirements. In fact, these measures were adopted to include requirements for banks to disclose information if and how they are exposed to cryptocurrencies.
The new rules require the approval of the European Parliament and the EU Finance Minister for the measure to become law.
Financial Capital Requirements For Crypto Banks
The proposed amendment states that banks should apply a risk weight of 1.250% to crypto asset exposure. This bill will include financial capital requirements for traditional institutions. This amendment means that when the rules apply, banks will have to be responsible for covering the total capital reserve and not gain leverage.
This proposed percentage happens to be the highest level of securitization that has been included in the Basel III reforms set by the committee.
The committee has set limits on the amount of capital banks can commit to crypto assets; the standard should be implemented at the beginning of 2025.
Markus Ferber, Economic Spokesperson for the Parliament’s Largest Political Group, said in a statement:
Banks will be required to hold euros from their own capital for every euro they hold in crypto. Such prohibitive capital requirements will help prevent instability in the crypto world from spilling over into the financial system. Over the past few years, we have seen that crypto assets are high-risk investments.
Caroline Liesegang, Head of Prudential Regulation at the Association of Financial Markets in Europe (AFME), stated:
The Parliament has made a positive step forward through changes in the legislative proposal of the Commission which should be given consideration during the interinstitutional negotiations.
The opinion of the Crypto Lobby Group
The Association of Financial Markets in Europe (AFME) is a lobby group that mainly acts for traditional financial organizations like investment banks with different opinions. He was concerned that the scope of this amendment might be too broad.
AFME said in an email:
There is no definition of crypto assets [legislation] and therefore the requirement can be applied to token securities, as well as non-traditional crypto assets targeted for interim treatment.
The organization said the drafting issue could be better handled in the legislative process.
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