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Banks be aware: new capital requirements for cryptoassets are in horizon

27 Jul 2022 FinTech

On 30 June 2022 the Basel Committee published a second consultation document on the prudential treatment of banks cryptoasset exposures. Among the updates made to the first document, the Basel Committee proposed to cap the exposure of banks to certain cryptoassets deemed to be less safe (such as unbacked cryptoassests or stablecoins with ineffective stabilization mechanisms) to a maximum of 1% of Tier 1 capital.

Now, the possibility of further capital requirements arises on the horizon, only this time the concerns are not so much related to the safety of cryptoassets but with the impact the energy-intensive cryptoassets have on the climate. In this context, in addition to other limitations in terms of using these assets in ESG investment strategies and warnings concerning the incorrect pricing in of negative ecological externalities and potential adverse policy measures, the European Central Bank suggests in its Macroprudential Bulletin of July 2022 that the Basel Committee should consider imposing addition capital requirements for banks holding cryptoassets with significant carbon footprint.

Banks must therefore be aware while defining their investment strategies and the crypto market must therefore adapt to these new developments if they wish to maintain cryptoassets a desirable investment for banks.