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Bitcoin part of highest risk category in Basel’s new bank capital plan

The Basel Committee on Banking Supervision (BCBS), a global committee of banking supervisors and central banks, has proposed new requirements for banks that want to hold cryptocurrencies like Bitcoin (BTC).

In a consultation paper published Thursday, the committee provided preliminary proposals for the prudential treatment of crypto exposure by banks.

The paper built on the contents of the committee’s 2019 discussion paper and responses received from various stakeholders and international industry figures.

Crypto’s perceived volatility and potential for illicit use led the BCBS to recommend a 1,250% risk weight to Bitcoin. This essentially means that banks must hold one dollar in capital for each dollar worth of exposure it has to Bitcoin.

According to the paper, this would ensure that there is sufficient capital to absorb a full write-off of crypto asset exposures “without exposing depositors and other senior creditors of the banks to a loss.”

The BCBS proposed to split crypto assets into two broad categories: those eligible for treatment under the Basel Framework with some modifications; and assets like Bitcoin (BTC), which are subject to the new conservative prudential treatment.

Source: Bank for International Settlements

Related: Global banking regulator plans to hold consultation on crypto exposure

The first category would include tokenized traditional assets as well as “crypto assets with effective stabilization mechanisms,” i.e. stablecoins.

The second group includes Bitcoin and other assets that “fail to meet any of the classification conditions” like applying a stabilization mechanism.

The BCBS noted that a high risk weight of 1,250% will lead to a “conservative outcome” for direct exposures of crypto assets. Regarding crypto derivatives, however, “care should be taken in defining what the ‘value’ is in the formula to ensure the outcome is similarly conservative,” the committee noted.

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