ECB: Banks holding crypto should start complying with Basel prudential requirements even before implementation date

Earlier this week, the European Central Bank (ECB) issued a statement informing banks that they should start complying with the new Basel prudential rules for crypto assets – even before the implementation date.

The latest version of the Bank of International Settlement’s “Basel requirements” entitled “Prudential treatment of crypto-asset exposures” was published on December 22, 2022.

The BCBS standard is not yet legally binding pending its transposition in the European Union. However, should banks wish to engage in this market, they are expected to comply with the standard and take it into account in their business and capital planning.

European Central Bank

What do the Basel rules for crypto exposures say?

As we previously reported, the BIS requirements split crypto into two separate categories, depending on the risk associated with each:

• Group 1 includes stablecoins and other cryptocurrencies with effective stabilization mechanisms (i.e. those which are considered less volatile such as traditional assets that have been tokenized) and
• Group 2 includes all other cryptocurrencies.

For Group 1, banks need to meet certain requirements, such as ensuring that the crypto-asset has legally enforceable rights and that its underlying network can sufficiently mitigate risks. Banks will also need to allocate capital based on the risk of the underlying assets (such as traditional assets) and may need to add additional capital if the crypto infrastructure is weak.

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For Group 2, which includes higher-risk assets like Bitcoin, banks will be subject to more conservative capital treatment, with a risk weight of 1250%. Additionally, there is an exposure limit for Group 2 crypto-assets, which is generally below 1% of a bank’s Tier 1 capital. If a bank breaches this limit, it will be subject to more conservative capital treatment.

The BIS has set an implementation date of January 2025, by which time banks are required to comply with the rules.