Basel Committee: Banks should apply 1250% risk weight to Bitcoin

If a bank holds cryptocurrency risk exposure, how should it measure its risk level?

On June 10, the Basel Committee on Banking Supervision published a public consultation draft on preliminary recommendations for prudently handling banks’ exposure to crypto assets. The draft suggests that banks’ exposure to Bitcoin and other cryptocurrencies should adopt a risk weight of 1,250%.

In practice, this means that under the 8% minimum capital requirement, banks may need to hold $1 worth of capital for every $1 worth of Bitcoin, Bloomberg reported.

"The growth of crypto-assets and related services has the potential to raise financial stability concerns and increase the risks faced by banks," the Basel Committee, which includes the Federal Reserve and the European Central Bank, said in the report. A risk weight of 1,250% would be sufficient to absorb the exposure from a full write-off of crypto-assets, thereby avoiding losses for depositors and other senior creditors of the bank.

According to the draft opinion, crypto assets are defined as private digital assets that rely primarily on encryption technology and distributed ledgers or similar technologies. And in order to clarify the minimum risk capital requirements for credit and market risks, crypto assets are screened and divided into two categories:

The first group of crypto assets includes tokenized traditional assets and crypto assets with effective stabilization mechanisms, such as stablecoins. Such crypto assets will be subject to at least the same risk-based capital requirements according to the risk weights of the underlying risk exposures specified in the existing Basel capital framework.

The second group of crypto assets, including Bitcoin, will bring more and higher risks, and will therefore be subject to new prudent capital constraints and should adopt a risk weight of 1250%.

The draft opinion divides crypto assets into two groups, with Bitcoin belonging to the second group of assets, and recommends a risk weight of 1250%

Since 2020, with the advent of the Bitcoin bull market, banks have also begun to gradually deploy in the cryptocurrency market. For example, the Bank of New York Mellon, the oldest bank in the United States, announced on February 11 that it would enter the market of Bitcoin and other digital currencies. According to a CNBC report on March 17, Morgan Stanley will open the rights of three Bitcoin funds and provide Bitcoin fund investment services to wealthy users.