EU capital rules could curb bank crypto market participation
The European Banking Authority has finalized draft rules for European Union-based banks holding cryptocurrencies on their balance sheets, aiming to harmonize capital requirements for crypto-asset exposures across the EU banking sector. These rules require significantly more capital against unbacked cryptocurrencies. The EBA intends for this framework to address implementation aspects and ensure consistency in capital requirements.
Upon finalization, the draft regulatory technical standards have been submitted to the European Commission. The Commission possesses a three-month period to either endorse the draft without alterations, amend it, or return it for redrafting. Should the Commission endorse the draft, it will then transition into a delegated regulation. This delegated regulation will subsequently be forwarded to both the European Parliament and the Council for review. A three-month objection window is allocated for these bodies, which can be extended to six months if deemed necessary.
The accompanying documentation specifying the risk weights outlines distinct categories for digital assets. Digital assets classified under Group 2 (subcategories ‘a’ and ‘b’) are assigned a general risk weight of 1,250%. Group 2b specifically encompasses “other” crypto assets, which includes unbacked cryptocurrencies such as Bitcoin. Group 2a refers to a subcategory within these assets that fulfills the hedging and netting criteria established by the Bank for International Settlements. Separately, Group 1b pertains to asset-referenced tokens, which are digital assets linked to traditional financial instruments; these are subject to a 250% risk weight. These specific risk weights were initially introduced as integral components of the Capital Requirements Regulation (CRR III) and became effective in July 2024.
The EBA’s latest draft introduces technical elements essential for the calculation and aggregation of crypto exposures. These elements encompass various risk modeling aspects, including credit-risk, market-risk, and counterparty-risk modeling. The framework also establishes a strict separation between different crypto assets, prohibiting the offsetting of assets such as Bitcoin and Ether against each other for capital requirement purposes. This ensures that each asset is treated independently in capital calculations.
The draft will automatically come into effect within 20 days of its publication in the Official Journal of the EU, provided neither the European Parliament nor the Council raises objections within their designated review period. These regulations are anticipated to directly impact European banks that currently hold crypto assets on their balance sheets. For instance, Italian bank Intesa Sanpaolo, which acquired 1 million euros worth of Bitcoin in January, would be required to hold 12.5 million euros in capital against that position under the proposed framework. Conversely, fintech firm Revolut is not expected to be significantly affected by these changes, as its crypto services are managed off-balance-sheet by its non-banking entity, Revolut Digital Assets Europe Ltd.
The EBA’s position on stringent capital requirements for crypto assets contrasts with regulatory developments observed in other jurisdictions. In late March, the US Federal Deposit Insurance Corporation (FDIC) issued a letter confirming that institutions under its oversight, including banks, are permitted to engage in crypto-related activities without requiring prior approval. In April, Switzerland implemented amendments to its Distributed Ledger Technology (DLT) Act, providing a clear legal framework that enables banks to custody tokenized securities and offer guarantees for stablecoin issuers.
Reports also indicate that US President Donald Trump intends to issue an executive order directing banking regulators to investigate claims of “debanking” within the cryptocurrency sector and among conservatives. The US banking sector is already responding to these shifts, with JPMorgan Chase reportedly exploring the provision of crypto-backed loans, indicating a potential reevaluation of how US banks approach crypto assets. The new EU capital rules could restrict bank involvement in the expanding digital asset market, particularly as decentralized finance and tokenization integrate further into mainstream financial services.