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Bank for International Settlements to allow banks to keep 1% of reserves in Bitcoin

Despite its skeptical approach to digital currencies, exacerbated by the recent cryptocurrency market crash, it looks like the Bank for International Settlements (BIS) intends to extend its hand to the new asset class by allowing banks to hold up to 1% of reserves in cryptocurrencies such as Bitcoin (BTC).

Indeed, BIS’s Basel Committee on Banking Supervision (BCBS) has made the proposal for limiting the banks’ total exposures to “Group 2 cryptossets to 1% of Tier 1 capital” in its consultative document titled “Second consultation on the prudential treatment of cryptoassets,” published on June 30.

Group 1 vs. Group 2 assets

Specifically, Group 2 refers to the assets that do not meet classification conditions and includes specific tokenized traditional assets and stablecoins, as well as unbacked crypto assets. As opposed to Group 2, Group 1 includes tokenized traditional assets and stablecoins that meet classification conditions.

Group 1 vs. Group 2 assets. Source: Bank of International Settlements

According to the document:

“Banks’ exposures to Group 2 cryptoassets will be subject to an exposure limit. Banks must apply the exposure limit to their aggregate exposures to Group 2 cryptoassets, including both direct holdings (cash and derivatives) and indirect holding (ie those via investment funds, ETF/ETN, special purpose vehicles).”

The document also specified that “a bank’s total exposure to Group 2 crypto assets must not be higher than 1% of the bank’s Tier capital at all times,” in line with the Basel Framework which includes all the BCBS’s standards. As it explained:

“The large exposure rules of the Basel Framework are not designed to capture large exposures to an asset type, but to individual counterparties or groups of connected counterparties. This would imply, for example, no large exposure limits on cryptoasset where there is no counterparty, such as Bitcoin.” 

With this in mind, “the Committee proposes, therefore, to introduce a new exposure limit for all Group 2 cryptoassets outside of the large exposure rules.” Meanwhile, this provisional limit set at 1% of Tier 1 capital would be reviewed periodically.

Skeptical stance toward crypto

Notably, Finbold earlier reported on the BIS using the recent crypto market collapse to affirm its skeptical attitude towards the assets class and warn about the materialization of its predictions about the dangers of decentralized finance (DeFi).

On top of that, the global central bank body released in early June a bulletin in which it presented its view that “crypto cannot fulfill the social role of money,” listing a number of problems it perceived in the crypto and blockchain industry, including high fees and network congestion that lead to the landscape fragmentation.