EU Banks Required to Assign Maximum Risk to Crypto Assets Under New Draft Law

The European Parliament has released a draft law that would require EU banks to place the maximum possible risk weight on crypto assets.

This could significantly impact the traditional financial sector's involvement with digital assets. The banks would need to disclose their direct and indirect exposure to crypto, as the European Commission prepares more specific rules for the sector. The Economic and Monetary Affairs Committee emphasized the need for the Union's prudential framework to properly reflect the increasing involvement of financial institutions in crypto-related activities in order to mitigate the risks of these instruments on their financial stability, especially in light of recent adverse developments in the crypto market.

The draft law imposes a risk weight of 1,250% on crypto assets, which provides little incentive for banks to hold crypto since they would have to hold capital equivalent to the amount of crypto they own, unlike other assets such as mortgages.

The law also asks the European Commission to draft further legislation by June, in line with international capital standards set by the Basel Committee on Banking Supervision. The Basel Committee has proposed a hard cap on banks' holdings of unbacked crypto like Bitcoin, but this does not seem to be included in the EU's draft law. The proposals must be approved by the EU member governments in the Council and the parliament before they can become law.