The European Parliament’s Economic and Monetary Affairs Committee has voted to impose strict regulations on banks seeking to hold cryptocurrency. A leaked version of the measure, reported by CoinDesk, reveals this is also a way to gauge the impact of new meets traditional financial systems
The move is intended to anticipate international norms that would limit the amount of un-backed assets such as Bitcoin and Ethereum that lenders can hold, before the European Commission proposes more extensive rules.
Determining Strict from Prohibitive
Under the proposed measures, banks will be required to hold one euro of own capital for every euro they hold in crypto. This “prohibitive” capital requirement is intended to prevent instability in the crypto world from spilling over into the financial system. Markus Ferber, the economic spokesman for the Parliament’s largest political grouping, commented that “over the past couple of years, we have seen that crypto assets are high-risk investments.”
The Association for Financial Markets in Europe is a lobbying group that represents traditional monetary organizations. The group voiced concerns that the scope of this amendment may be too far-reaching. They stated that “there is no definition of crypto assets in the measure. Therefore, the requirement may apply to tokenized securities in addition to the non-traditional digital currency the interim treatment is focused on.” The Association requested these issues be handled later in the legislative process.
Weighing Potential Risks
The move from the Parliament’s committee mimics rules set out by the Basel Committee on Banking Supervision, an international standard setter for the industry. The Basel Committee has proposed that holdings of un-backed crypto should be given the highest possible risk weighting, and also be limited as a proportion of a bank’s total issuance of core financial instruments.
In order for the measures to pass into law, they still need approval from the European Parliament, as well as being negotiated with national finance ministers who meet in the Council of the European Union as part of a fuller package of bank capital reforms. The move highlights the growing concern among regulators and lawmakers around the world about the potential risks posed by the growing crypto market and its impact on the traditional financial system.