European Banking Authority (EBA) Officially Finalizes “Cryptocurrency Capital Rules Draft” on August 5
The EBA has mandated banks to set a 1,250% risk weight for “unsecured” crypto assets such as BTC.
EBA Sets High Capital Threshold, Restricting Banks from Holding BTC
The EBA’s “Draft Technical Standards on Capital Requirements for Crypto Assets” clearly states that if banks include “unsecured” crypto assets (BTC) on their balance sheets, they must calculate the required capital based on a 1,250% risk weight. This means:
“For every 1 euro of BTC held on a bank’s balance sheet, it must prepare up to 12.5 euros of risk capital, translating to a 1,250% risk weight.”
This regulation aims to implement the framework for crypto assets outlined in the Capital Requirements Regulation (CRR III), which will take effect in July 2024, and is intended to guide banks on how to assess the risk and capital requirements for their crypto asset holdings.
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EBA Clearly Classifies BTC as Unsecured Asset
The draft will be submitted to the European Commission, entering a three-stage legislative process. The Commission has three months to decide whether to fully accept the draft or request revisions before returning it for further drafting.
If the draft is adopted by the Commission, it will further become a “Delegated Regulation,” subject to review by the European Parliament and the Council of the EU. Both bodies will have up to six months to raise objections. If there are no objections, the new regulations will be published in the EU Official Journal and will come into effect 20 days later.
Token Classification Standards and Corresponding Risk Weights
Group 1, Category b: Assets that qualify as Asset Reference Tokens (ARTs) or Electronic Money Tokens (EMTs), including tokens issued under the Markets in Crypto-Assets Regulation (MiCA), which carry a risk weight of 250%.
Group 2, Category a: Crypto assets that do not meet the main classification criteria but possess certain hedging capabilities, including tokenized assets, stablecoins, and unsecured crypto assets. Despite having some degree of hedging or netting design, they must be calculated with a 1,250% risk weight due to not meeting prudential supervisory requirements.
Group 2, Category b: Other crypto assets that do not meet classification criteria and do not meet the hedging recognition standards of Group 2, Category a, such as BTC, which carry a risk weight of 1,250%.
What Restrictions Are There for Banks Holding BTC?
According to the draft, banks must handle assets like BTC as follows:
- Cannot be used as collateral
- Cannot be risk-hedged with other assets
- Must independently calculate each exposure, including spot, futures, ETNs, and ETFs
- Derivative positions must also consider counterparty risk (CCR), market risk (MR), and valuation risk (CVA)
What Is the Exposure Limit for Unsecured Crypto Assets Like BTC?
The draft states that for unsecured crypto assets like BTC, the total exposure amount for banks cannot exceed 1% of their Tier 1 capital. In other words:
“If a bank has Tier 1 capital of 1 billion euros, it can only expose up to 10 million euros in BTC or similar assets.”
This limitation aims to prevent banks from exposing excessive capital to highly volatile and fundamentally unsupported crypto assets.
Even if a bank’s internal risk appetite is high, it cannot arbitrarily increase its positions in such assets.
Why Is the Risk Weight So High?
The draft indicates that setting a risk weight of up to 1,250% for unsecured crypto assets (BTC) is based on several reasons. First, these assets exhibit extreme price volatility, lack unified accounting and valuation standards, and most trading occurs over-the-counter (OTC), leading to opaque price formation and heightened operational and counterparty risks.
Furthermore, if banks hold related derivative positions with high leverage, losses can escalate rapidly, potentially exceeding the capacity of risk capital, thereby threatening overall financial stability, which is why such a high risk weight has been set.
Standards for Bank Trading of Cryptocurrencies
The draft states that if banks trade crypto assets via ETFs, ETNs, or futures, they must meet the following conditions:
- The cryptocurrency must have an average market capitalization exceeding 10 billion euros over one year.
- The average daily trading volume must reach 50 million euros over one year.
- There must be at least 100 records of “verifiable prices.”
These conditions are used to differentiate between mature, high-risk cryptocurrencies, but even if they meet the criteria, they still must be treated with a 1,250% risk weight.
Valuation Standards Yet to Be Unified, EBA Calls for Banks to Prepare
The draft points out that currently, there is no unified and clear valuation method established for crypto assets (such as BTC) under International Financial Reporting Standards (IFRS), which may lead to inconsistencies in banks’ evaluations of these asset values.
The EBA believes that stricter “Prudent Valuation” principles will be introduced in the future to ensure more robust price assessments for crypto assets. However, since we are still in a transitional period and most banks have low exposure amounts in crypto assets, the EBA hopes banks will prepare in advance, although no mandatory requirements are in place at this time.
Risk Warning
Investing in cryptocurrencies is highly risky, and their prices may fluctuate dramatically, potentially resulting in a total loss of principal. Please assess the risks cautiously.