Bitcoin is part of the highest risk category in the new Basel bank capital plan

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

In a consultation paper published on Thursday The committee made preliminary proposals for the prudential treatment of banks’ exposure to cryptocurrencies.

The document was based on the content of the Committee’s 2019 Discussion Paper and responses from various stakeholders and international industry representatives.

Bitcoin is part of the highest risk category in the new Basel bank capital plan
Bitcoin is part of the highest risk category in the new Basel bank capital plan

The perceived volatility of cryptocurrencies and the potential for illegal use led the BCBS to recommend a risk weight of 1,250% for Bitcoin.. Essentially, this means that for every dollar they invest in Bitcoin, banks must hold one dollar in capital.

According to the document, This would ensure there was enough capital to absorb a full write-off of crypto asset exposures, “without subjecting depositors and other senior bank creditors to a loss”.

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

Source: Bank for International Settlements

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

The second group includes Bitcoin and other assets that “do not meet any of the qualification requirements,” such as the use of a stabilization mechanism.

The BCBS found that a high risk weight of 1,250% will result in a “conservative score” for direct exposures to crypto assets. However, With regard to cryptocurrency derivatives, “careful consideration must be given to defining” value “in the formula to ensure that the outcome is equally conservative,” the committee noted.

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