In January, the EU Parliament voted on legislation that includes plans to implement the Basel Committee rules for banks and crypto assets, which impose capital and liquidity requirements. On Friday, the EU published the wording used for the parliamentary vote. It confirms that banks are expected to treat crypto assets with a 1250% risk weight as an interim measure until detailed legislation is implemented. That means they must have one euro of capital for every euro of crypto on their balance sheets.

It also highlights the problematic wording of the draft because the Basel Committee included tokenized securities in the term ‘crypto-assets’ but gave them a conventional risk weight. Basel intended the 1250% risk weight to apply primarily to cryptocurrencies, not securities, but the EU draft text does not make this distinction. Hence the concern of the industry body AFME about the wording of the bill.

There is still time to remedy the wording because the EU Parliament has only taken its first vote. The legislation now goes through a tripartite negotiation process between the Commission, Parliament and the European Council on behalf of each country.

An additional point is that the EU requires the disclosure of cryptocurrencies even if the amounts are not significant. Most of the Basel rules require disclosures primarily for material items.

The three relevant paragraphs in the amendments to the Capital Requirements Regulation are copied below for convenience.

42nd:
The rapid increase in financial market activity with respect to crypto-assets and the possible increasing involvement of institutions in activities related to crypto-assets should be fully reflected in the Union prudential framework, in order to adequately mitigate the risks of these instruments for entities. financial stability. This is all the more urgent in light of recent adverse developments in the crypto asset markets. Existing prudential rules are not designed to adequately capture the risks inherent in crypto assets. The recently published BCBS rules on the prudential treatment of crypto asset exposures, which will be implemented on January 1, 2025, provide specific prudential treatment that should be implemented into Union legislation in a timely manner. The Commission should monitor these developments and, if appropriate, adopt a legislative proposal by 31 December 2024 to transpose the different elements of the BCBS rules into Union law. Until the legislative proposal is adopted, the exposure of entities to crypto assets should apply prudent own funds requirements.

Article 451b is inserted: Disclosure of exposures to crypto assets and related activities

1. Institutions will disclose the following information about crypto assets and crypto asset services, as well as any activity related to crypto assets:
   a) the amounts of direct and indirect exposures in relation to crypto-assets, including gross long and short components of net exposures;
   (b) the risk-weighted exposure amounts for each crypto asset, to be supplemented by a breakdown by category and related capital demand;
   c) the total amount of risk exposure for operational risk broken down by business lines as established in table 2 of article 317;
   (d) the accounting classification of exposures to crypto assets;
   (e) a description of the trading activities related to crypto assets and their impact on the risk profile of the institution; Institutions will need to provide more detailed information for significant business activities, including the issuance of significant asset-referenced tokens within the meaning of Articles 43 and 44 of the MiCA Regulation, significant electronic money tokens within the meaning of Articles 56 and 57 of the MICA Regulation and the provision of services [under Art. 9(c)(d) of MiCA Regulation];
   f) a specific description of its risk management policies related to crypto asset exposures and crypto asset related services.
2. Entities shall not apply the exception provided for in article 432 for the purposes of the information requirements of section 1.»

   Editors Note: Section 432 would normally indicate the need to disclose non-material items.

Insert article 461b: Prudential treatment of crypto assets

1. The Commission will, where appropriate, submit a legislative proposal to the European Parliament and the Council, by June 30, 2023, to apply a specific prudential treatment for exposures to crypto assets, taking due account of recently published international standards and the requirements established by the [insert reference to MiCA Regulation]. Such legislative proposal shall include, but shall not be limited to, the following:
   (a) criteria for assigning crypto assets to different categories of crypto assets based on their risk characteristics and compliance with specific conditions;
   (b) specific own funds requirements for all risks involved in each category of crypto assets;
   c) specific supervisory powers regarding the allocation of exposure to crypto assets, monitoring and calculation of own funds requirements;
   (d) specific liquidity requirements for exposures to crypto assets;
   (e) disclosure requirements.
2. Until December 30, 2024, institutions will apply a risk weight of 1,250% to their exposures to crypto assets in the calculation of their own funds requirements. Entities shall not apply the deduction provided for in article 36, paragraph 1, letter b), for the calculation of their own funds requirements.”

   Editor’s Note: 36(1)(b) refers to intangible assets.