In January, the EU Parliament voted on legislation that includes plans to implement the Basel Committee rules for banks and crypto-assets, which imposes capital and liquidity requirements. On Friday, the EU published the wording used for the Parliamentary vote. It confirms that banks are expected to treat crypto-assets with a 1250% risk weighting as an interim measure until detailed legislation is implemented. That means they have to hold a euro in capital for every euro of crypto on their balance sheets.
It also highlights the problematic draft wording because the Basel Committee included tokenized securities in the term ‘crypto-assets’ but gave them a conventional risk weighting. Basel intended the 1250% risk weighting mainly to apply to cryptocurrencies, not securities, but the draft EU text fails to make this distinction. Hence the concern of the industry body AFME about the wording of the draft legislation.
There’s still time to remedy the wording because the EU Parliament has only made its first vote. The legislation now goes through a trilogue negotiation process between the Commission, Parliament and the European Council representing each country.
One additional point is that crypto disclosures are required by the EU even if the amounts are not material. Most Basel rules require disclosures mainly for material items.
The three relevant paragraphs in the Capital Requirements Regulation amendments are copied below for convenience.
The rapid increase in the financial markets’ activity on crypto-assets and the potentially increasing involvement of institutions in crypto-assets related activities should be thoroughly reflected in the Union prudential framework, in order to adequately mitigate the risks of these instruments for the institutions’ financial stability. This is even more urgent in light of the recent adverse developments in the crypto-assets markets. The existing prudential rules are not designed to adequately capture the risks inherent to crypto-assets. The recently published BCBS standards on the prudential treatment of crypto-asset exposures, to be implemented by 1 January 2025, provide a dedicated prudential treatment that should be implemented in Union law in a timely manner. The Commission should follow up on these developments and, if appropriate, adopt a legislative proposal by 31 December 2024, to transpose the different elements of the BCBS standards into Union law. Until the legislative proposal is adopted, institutions’ exposure to crypto-assets should apply prudent own funds requirements.
Article 451b to be inserted: Disclosure of exposures to crypto-assets and related activities
- Institutions shall disclose the following information on crypto-assets and crypto- asset services as well as any activities related to crypto-assets:
(a) the direct and indirect exposure amounts in relation to crypto-assets including the gross long and short components of net exposures;
(b) the risk weighted exposure amounts for each crypto-asset, to be complemented by a break down by category and the related capital demand;
(c) the total risk exposure amount for operational risk broken down by business lines as set out in Table 2 of Article 317;
(d) the accounting classification for crypto-asset exposures;
(e) a description of the business activities related to crypto-assets, and their impact on the risk profile of the institution; institutions shall provide more detailed information for material business activities, including the issuance of significant asset-referenced tokens within the meaning of Articles 43 and 44 of MiCA Regulation, significant e-money tokens within the meaning of Articles 56 and 57 of MiCA Regulation and the provision of services [under Art. 9(c)(d) of MiCA Regulation];
(f) a specific description of their risk management policies related to crypto-asset exposures and services related to crypto-assets.
- Institutions shall not apply the exception laid down in Article 432 for the purposes of the disclosure requirements in paragraph 1.’
Editors note: Article 432 would usually wave the need to disclose non-material items.
Article 461b to be inserted: Prudential treatment of crypto assets
- The Commission shall, where appropriate, submit a legislative proposal to the European Parliament and the Council, by 30 June 2023, to implement a dedicated prudential treatment for exposures to crypto-assets, taking due account of the recently published international standards, and the requirements set up by the [insert reference to MiCA Regulation]. That legislative proposal shall include, but not be limited to, the following:
(a) criteria for assigning crypto-assets to different crypto-asset categories based on their risk characteristics and compliance with specific conditions;
(b) specific own funds requirements for all the risks entailed by each crypto-asset category;
(c) specific supervisory powers as regards crypto-asset exposure assignment, monitoring and calculation of own funds requirements;
(d) specific liquidity requirements for exposures to crypto-assets;
(e) disclosure requirements.
- Until 30 December 2024, institutions shall apply a 1250% risk weight to their exposures to crypto-assets in the calculation of their own funds requirements. Institutions shall not apply the deduction in Article 36(1), point (b), for the calculation of their own funds requirements.’
Editors note: 36(1)(b) refers to intangible assets.