EU draft banking bill assigns highest risk score to crypto

A new banking draft from EU lawmakers proposes that banks assign cryptocurrencies the highest risk weight of 1,250% until December 2024.

Banks in the EU must also disclose business operations and risk frameworks related to each crypto exposure.

The EU bank bill depends on the MiCA outcome

According to the draft, banks must also hold minimum capital reserves commensurate with the risk associated with each crypto exposure. They must maintain 100% capital requirements for all crypto exposures until December 2024.

Crypto’s higher risk rating is consistent with capital requirements for risk-weighted assets under the Basel Committee on Banking Supervision’s Basel III reforms. The banks must hold capital according to the higher amount obtained from internal and standardized risk assessments. The 1250% rating is the upper limit of capital required for certain risk-weighted assets in the standardized risk framework.

The EU Council and Parliament must vote on the draft for it to become law across EU member states.

The new draft banking legislation withdraws the upcoming Markets-in-Crypto Assets legislation scheduled for a vote in the European Parliament at the end of April 2023.

The new bill regulates the issuance and trading of cryptoassets and requires miners to disclose their energy consumption. New crypto projects must delineate the project’s risks in a mandatory white paper.

Lawmakers finalized the new regulations in October 2022, but the burden of translating the document into the 24 languages ​​of the EU bloc delayed its release.

US banking regulators are tightening the noose around crypto

The relationship between crypto companies and banking institutions has come under increasing regulatory scrutiny amid recent SEC enforcement actions and the general anti-crypto sentiment promoted by several US regulators.

The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation said they would closely monitor US banks with crypto exposure and look to prevent crypto’s outsized risks from entering the US banking sector.

Unlike the EU bill, their report did not provide specific risk exposures and associated capital requirements.

In the wake of a joint report released by regulators in early January 2023, Metropolitan Bank shut down its crypto vertical, while Signature Bank limited USD transfers for Binance customers to $100,000 or more. British Virgin Islands quant trading firm Statistica Capital recently announced a putative class action against Signature over its alleged knowledge of the commingling of funds between clients of collapsed exchange FTX and its sister hedge fund Alameda Research.

Silvergate Capital, another traditional financial institution, was recently the target of an investigation by US prosecutors for its links with FTX and Alameda. FTX’s former CEO, Sam Bankman-Fried, faces charges of wire fraud and other crimes related to the mismanagement of client funds.

Banks involved in New Choke-Point

Crypto venture capitalist Nic Carter recently compared the marginalization of crypto by US banks to an Obama-era program called Operation Choke-Point.

The program deprived politically polarizing but legally compliant industries of access to the banking sector. President Joe Biden’s acting Comptroller of the Currency reversed his predecessor’s efforts to limit political interference in the banking sector. Currently, banks attribute higher risk to industries that are sure to attract government opposition, Carter argues.

And recent regulatory resistance suggests that crypto may be seen as such.

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