Key Highlights
- The Federal Reserve will release the Basel proposal next week, which will share details on how U.S. banks apply global risk-weighting rules to crypto
- Under this rule, BTC is currently stuck at a punishing 1250% risk weight, which restricts banks from integrating BTC with mainstream banking finance
- The Bank Policy Institute is planning to submit a public comment to ensure that U.S. regulators get Bitcoin’s treatment right
On March 12, the Federal Reserve revealed its plan to release a proposal next week that will explain how major American banks must follow new international rules, known as Basel risk weighting guidance. This could finally change the unfair way Bitcoin (BTC) is currently treated under banking regulations.
Bitcoin’s 1250% Risk Weight Blocks Banks from BTC Services.
According to the current guideline, Bitcoin is currently linked to 1250% risk weighting under the Basel Committee on Banking Supervision’s cryptoasset framework (SCO60) by classifying it as a high-volatility Group 2b asset. Due to this guideline, banks are required to hold capital to 100% of any Bitcoin exposure.
This rule is harsher than any other asset class. For comparison, speculative stocks with very high risk are only required by banks to hold up to 400% in capital. At the same time, government bonds from stable countries require around 0%.
This kind of strict rule has created a total blockade and restricted Bitcoin from being integrated into the traditional banking system. Banks can not afford to hold Bitcoin on their balance sheets, offer custody services to customers, or issue loans secured by Bitcoin as collateral. The reason behind this is strict laws, because doing the same would require them to hold an equal amount of cash as a safety reserve.
This also makes services like market-making, prime brokerage, or even basic banking services for Bitcoin companies prohibitively expensive to offer.
Strict Basel risk weighting guidance has forced BTC-related activity to shift into unregulated spaces or offshore entities, which stopped banks from participating in the world’s biggest cryptocurrency by market capitalization. At present, the cumulative market capitalization is revolving around $1.4 trillion, according to CoinMarketCap.
Conner Brown, Managing Director at Bitcoin Policy Institute, stated in the post on X, saying that, “Bitcoin is currently treated as a toxic asset under Basel regulations, subject to a 1250% risk weighting, harsher than virtually all other asset classes.”
According to the experts, the rule is a “category error” that ignores Bitcoin’s proven 16-year track record of resilience, along with its growing institutional demand from exchange-traded funds (ETFs).
Once the Federal Reserve’s proposal is released, there will be a 90-day public comment period on the proposal. The Bank Policy Institute has already indicated that it will submit detailed recommendations to “ensure that U.S. regulators get Bitcoin’s treatment right.”
If that happens, their recommendations might reduce the current harsh 1250% default risk weight with frameworks based on actual market risk, operational safety measures, and conservative concentration limits.
Federal Reserve Vice Chair for Supervision Michelle W. Bowman stated in the press release that “We have developed proposals to modify each of the four pillars of our regulatory capital framework for the largest banks: stress testing, the supplementary leverage ratio, the Basel III framework for risk-based capital requirements, and the G-SIB surcharge.”
She said, “The Federal Reserve is taking steps to modernize our capital requirements and is working together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to propose joint rulemakings. The proposals take into account the aggregate impact of revisions already introduced to the enhanced supplementary leverage ratio (eSLR), which would restore it to its role as a backstop to risk-based capital requirements and to the stress testing framework.”
Despite the delay in the CLARITY Act, these reforms will open the door for Bitcoin to boost its mainstream adoption.
If reforms take place, banks will be able to custody BTC for clients, offer BTC-backed lending to miners and companies, and integrate digital assets into their treasury operations. This would also boost institutional adoption in the upcoming years under the positive developments in the regulatory framework for the crypto market.
Also Read: Arthur Hayes Says Bitcoin Outshines Gold in War Markets
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