EU Lawmakers Reaches Agreement On Prohibitive Capital Rules For Cryptoassets

Key Points:

• The European Union has reached a political agreement on new bank-capital laws, including regulations around cryptoassets.
• The regulations would require banks to retain enough capital to cover all cryptoasset holdings and provide little incentive for banks to enter the market.
• Regulated stablecoins may face less stringent regulations under a compromise presented by the European Commission.

As legislators sought prohibitive rules to keep unbacked crypto out of the conventional financial system, the European Union reached a political accord on new bank-capital laws, including cryptoassets, on Tuesday.

The political agreement, which also includes extensive and contentious reforms to how banks evaluate the risk of business and residential loans, must now be agreed on by member states in the EU Council and by legislators to become law, a process that may take several months in reality.

The agreement was announced by the European Parliament’s Economic and Monetary Affairs committee after a meeting of officials from the Parliament, national governments, and the European Commission, which proposed the new regulations in 2021.

The Parliament’s economic affairs committee endorsed a draft proposal to apply Basel III capital regulations beginning in January 2025 while also supporting certain temporary deviations to allow banks more time to adjust.

Similar efforts are being taken in the United States, the United Kingdom, and other countries, but the committee utilized the draft legislation to incorporate new aspects, such as mandating banks to retain enough capital to cover all cryptoasset holdings.

The new regulations, which include modify the risk weighting for banking assets such as corporate loans, would improve the strength and resilience of banks functioning in the Union, said Swedish Finance Minister Elisabeth Svantesson, who presided over the negotiations on behalf of the member states.

The Council statement added affirmed the agreement included a transitional prudential regime for cryptoassets, but did not go into greater detail.

The Parliament has already voiced support for “prohibitive” measures to separate cryptocurrencies from the banking system, and the Council, which represents member states, now seems to be on board with the ideas.

It means banks would have to provide a euro of capital for every euro of Bitcoin (BTC) or Ether (ETH) they own, providing little incentive to enter the market. EU legislators are eager for such measures to go into force as quickly as possible.

That stringent attitude would be significantly modified for regulated stablecoins under a compromise secretly presented by the European Commission late during the discussions, which seems to have gained favor among EU countries, who must also agree before the measure becomes law.

According to some conventional banking lobbyists, the Parliament first advocated a cautious approach, recommending a 1,250 percent risk weight for crypto assets, which might stymie deal-making.

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