Capital markets Legal and IP News

EU Parliament passes Basel III rules, including crypto assets clause

EU basel iii crypto assets

Yesterday the European Parliament’s Economics and Monetary Affairs Committee approved a draft law to implement the Basel III rules on banking capital and liquidity requirements. Included in the draft legislation is a single clause relating to crypto assets, requiring a euro of balance sheet capital for a euro of every crypto asset held. 

This particular requirement is an interim measure intended to run until the end of 2024, as the European Commission was requested to present more detailed proposals by June 2023.

Because the full coverage of crypto-assets as proposed by the Basel Committee has not yet been addressed, the abridged treatment has some issues. The proposed 1250% risk weighting for crypto assets (the 1-for-1 capital clause) refers to ‘crypto assets’ without defining the term. 

“More work is still needed on the crypto assets proposal to better define its scope to ensure tokenised securities are not captured,” said Caroline Liesegang, Head of Prudential Regulation at industry body AFME.

The final Basel proposals on crypto assets allow tokenized securities to have a conventional risk weighting in most cases. The timing matters because the DLT Pilot regime that covers tokenized securities comes into force in March.

We’d argue that another potential issue is what one defines as ‘exposure’. For months until the final Basel proposals were announced, banks fretted that crypto custody was considered as exposure and might be subject to the one-for-one capital requirements. However, the Basel Committee clarified this was not its intention.

Additionally the draft law requires disclosure of crypto-asset related activities including those defined by the MiCA legislation.

The document used for yesterday’s vote has yet to be formally published. There’s still a way to go before the draft legislation is adopted because the European Union (EU) has its cumbersome trilogue process in which the Parliament, European Council representing the member states, and the European Commission come to an agreement before a final vote. Hence AFME suggested the crypto asset definition might be ironed out during that process.

The timing of any final vote and when the legislation might come into force is not yet clear.

The legislation also includes environmental, social and governance (ESG) impact when assessing bank risks.

Updated: added reference to disclosures and timing

Image Copyright: Composite Ledger Insights