ECB advises banks to adhere to conservative caps on Bitcoin exposure

The European Central Bank (ECB) expects EU banks to impose limits on their crypto holdings even before the Basel Committee on Banking Supervision’s (BCBS) global standards take effect in 2025.

These standards have grouped cryptocurrencies into two groups based on the specific risks they pose, and provide banks with guidance on how to manage their exposure to each group.

Bitcoin, for example, has been defined as an “unsupported” asset placed in group 2 of risky assets. Included in this tier are all assets that do not meet BCBS’s classification conditions, which include the asset’s ability to avoid “significant risk” and address money laundering concerns.

Stablecoins with “inefficient” mechanisms to maintain their peg, for example, would also fall into this group.

As such, they are “subject to a newly prescribed conservative capital treatment with a risk weight of 1,250%” and an exposure limit below 1% of the banks’ core capital, the ECB said in a newsletter on Wednesday.

Unlike Group 2, Group 1 cryptocurrencies include tokenized versions of traditional assets, some types of stablecoins that do not rely on algorithms to maintain their price, and potentially Central Bank Digital Currency (CBDCs).

The recommendation follows new draft EU rules released earlier this week, which stipulate that banks holding cryptocurrencies could be obliged to assign the digital assets the highest possible risk rating of 1,250%, meaning they would be forced to hold equal a lot of capital to match the crypto they hold.

Crypto-related risk management schemes

The ECB claims that although the BCBS standard is not yet law, banks interested in entering the crypto market are “expected to comply with the standard and take it into account in their business and capital planning.”

Before rolling out crypto services, banks must ensure that the services or products are in line with the firm’s “risk appetite and its strategic objectives” as defined by its respective board of directors.

Using adequate handrails to onboard cryptocurrencies is nothing new in Europe. Last month, the European Parliament’s Economic and Monetary Affairs Committee passed a draft law that would require banks to hold more capital to protect against potential crypto losses.

This is confirmed by a spokesperson for the committee Decrypt at the time that the new measures also require banks to disclose whether they have any exposure to cryptocurrencies.

Before it comes into force, the new law will need approval from the EU Parliament, as well as the EU finance ministers.