• The Basel Committee makes a conservative proposal to limit banks’ holding of BTC to 2 percent of their reserves. 
• The development is bullish for crypto as it brings regulatory clarity to traditional financial institutions. 

Banks could soon drive the next wave of Bitcoin and cryptocurrency adoption. A new rule suggested by the Basel Committee on Banking Supervision (BCBS) will allow banks to hold up to 2 percent of their reserve in Bitcoin.

The BCBS is the banking standards-setting arm of the Bank for International Settlements (BIS). It made the suggestion in a consultation paper it published titled ‘Prudential treatment of crypto-asset exposures – second consultation.’

The paper groups crypto assets into two cohorts. The first cohort, Group 1, are tokenized traditional assets and crypto assets that have an “effective stabilization mechanism.” These crypto assets will be subject to risk-based capital requirements set out in the existing Basel capital framework.

Group 2 assets are where the BIS is applying the new rules. The consultation paper defines this group as crypto assets that fail to meet the classification conditions of Group 1 assets. According to the BIS, this group, which includes Bitcoin, poses a higher risk to financial systems as they do not have an identifiable counterparty.

The current rules of the Basel Framework are not designed to accommodate such financial instruments. Hence the need for the new rule outside of the Basel Framework, the paper clarified.

Certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increase, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering/terrorist financing risk; and legal and reputation risks,

It added that as the crypto industry expands, these risks increase with it. Hence, it sees the need to regulate the market despite its small size relative to the global financial market.

How bullish is the rule for mainstream crypto adoption?

The suggested rule changes are in keeping with the regulator’s cautious approach to crypto regulation so far. While it is largely conservative, it is still highly bullish for the mainstream adoption of Bitcoin and other crypto assets.

The rule means that banks have regulatory clarity on gaining crypto exposure when it goes into effect in 2025 in all BIS jurisdictions. However, per the BCBS statement, the cap percentage has not been finalized and could still be reviewed up or down.

The BCBS’ is already under pressure from lobby groups to review the rule. Back in October, the Global Financial Markets Association and Institute for International Finance, a group of TradFi firms, warned the BIS that the proposed cap on crypto exposure could prohibit the market.

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