Global regulator approves new banking regulations for crypto

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  • December 18, 2022

On Friday, the Basel Committee for Banking Supervision (BCBS) announced that its global crypto banking rules would be implemented as of January 1, 2025.

Details on the global crypto banking rule

This new policy will limit bank’s holdings of Bitcoin to no more than 2% of its Tier 1 capital. The Central Bank Governors and the Group of Heads of Supervision (GHOS), the primary global standard setter for regulation of banks, have also given their approval.

Bitcoin, along with other tokenized traditional assets and stablecoins that don’t meet the classification, falls within the policy’s Group 2 crypto asset category. The document also states that a bank’s total investment to Group 2 crypto assets must not exceed 2% of its Tier 1 capital.

Eight groups representing conventional banks had previously written to the committee expressing concern that a 1% cap on banks could be overly restrictive and hinder advancements in distributed ledger technology. 

“Today’s support by the group marks a critical milestone in developing a global regulatory baseline for limiting risks to banks from crypto assets,” stated Tiff Macklem, Chair of the GHOS monitoring group.

Criteria for assets categorization 

The criteria for categorizing assets include making sure cryptocurrencies pass a basic and redemption risk test. The study employs a redemption risk test to make sure there are sufficient reserve assets to always honor redemption for cryptocurrencies.

Basis risk testing, on the other hand, is meant to ensure that a crypto owner can sell their holdings at a price that is close to the peg value, as explained in the study.

The committee’s crypto criteria will be incorporated into the updated Basel Framework soon, according to the document. Local authorities are free to decide for themselves whether or not to adopt these standards.

Why regulating the crypto sector is essential

Because of the volatility of the bitcoin market recently, authorities are proceeding with caution. There were billions of dollars in losses in the cryptocurrency market this year following the collapse of Terra, FTX, and some CeFi companies, including Voyager and BlockFi.

Aaron Klein, an expert in Economics, opines that new legislation would help safeguard long-term investors, reduce fraud, and provide the much-needed clarity.

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