A new policy by the Bank for International Settlements (BIS) will permit banks to hold 2% of their reserves in cryptocurrencies.
The BIS recently issued its Prudential Treatment of Cryptoasset Exposure report for December 2022 in which it introduced a policy that now allows banks to hold 2% of their reserves in cryptocurrencies. The policy, the second consultation of one published earlier in the year, covers several aspects of how crypto assets are to be defined, processed, and is set to take effect on January 1, 2025. In the first iteration of this report, published in June, the BIS announced that banks would be limited to holding no more than 1% of their reserves in cryptocurrencies.
The policy groups crypto assets into two cohorts. Group 1 is defined as tokenized traditional assets and crypto assets that have an “effective stabilization mechanism.” Group 2 are referred to as digital assets that “fail to meet any of the classification conditions of Group 1 assets.” Group 2 assets are where the BIS is applying its new rules. Per the BIS, Group 2 assets, which include Bitcoin, pose a greater risk to financial systems as they do not have an identifiable counterparty. The paper specifies that a bank’s exposure to Group 2 crypto assets should not exceed 2% of the bank’s Tier 1 capital, within their reserves. Group 2 financial instruments have not yet been accommodated under rules set out by the BIS and therefore necessitate new policy, 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.
The BIS report further adds that as the digital asset industry expands, inherent risks increase in tandem. Hence, a need to regulate the market despite its small size relative to the global market is required.
In its detailing of the risks and supervision of Group 2 assets, the report states:
The required process has been modified to remove the supervisory pre-approval element; instead, in the final standard banks are required to notify supervisors of classification decisions and supervisors will have the power to override these decisions if they disagree with a bank’s assessment.
Is This Bullish for Crypto?
Regulators have largely maintained a rather cautious approach to regulating the sector so far and the rule proposed by the BIS remains in line with this. While this policy is somewhat conservative, it is bullish for the mainstream adoption of Bitcoin and the rest of the crypto asset industry. The introduction of this new policy means that banks are afforded some clarity on gaining crypto exposure when the rule takes effect in all BIS jurisdictions in 2025.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.