EU Pass New Bank-Capital Legislation on Cryptocurrency

Updated: 27 June 2023

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European Union (EU) representatives have approved new legislation to safeguard the financial system by preventing unbacked digital assets from gaining unfettered access to traditional banking.

Impact on Traditional Finance Structure

The European Union has reached a political agreement on a new bank-capital framework, which includes crypto assets to boost the resilience of banks, strengthen supervision and risk management.

Following a lengthy meeting with lawmakers and representatives of the Council Parliament, the European Commission, and the national governments, a provisional agreement was sanctioned to amend the existing Capital Requirements Regulation and the Capital Requirements Directive.

The announcement of the official agreement was made public by the European Parliament’s Economic and Monetary Affairs.

On Tuesday 27/06 @EP_Economics negotiators struck a deal
on changes to Capital Requirements Regulation & Directive #CRR & #CRD @jonasfernandez w/ #EU2023SE details will follow pic.twitter.com/7eRCgk7Eg5

— ECON Committee Press (@EP_Economics) June 27, 2023

Swedish Finance Minister Elisabeth Svantesson, who acted as a moderator between EU member states, stated that the new rules would create a holistic approach to the risk weighting for banking assets such as corporate loans.

Digital currencies have also been factored into the new regulatory oversight. According to the new framework, cryptocurrencies will have a 1,250% weighting ratio, which is quite high.

It is also a clear signal of the Euro bloc’s position on cryptocurrencies, which it labeled as unbacked assets.

This would require banking and traditional financial institutions to issue a Euro of capital for every Euro invested in Bitcoin (BTC) or Ethereum (ETH), potentially discouraging extensive trading in the emerging financial market.

With the new policy, all banks in EU regions will have the strength and resilience to operate seamlessly.

The banking system could also permanently avert the risk of liquidation caused by crypto assets if the framework is adhered to closely.

European Council Stance on Prudential Regime for Crypto Assets

Following the meeting with EU lawmakers and representatives, the European Council issued a public statement highlighting the inclusion of a smooth transition towards a prudent regime for cryptocurrencies in the regulatory policy.

While the EU continues to create the best bank-capital policy, Basel Committee on Banking Supervision (BCBS) is set to finalize a reformed global crypto framework by January 1, 2025.

On the offset, traditional virtual currencies like Bitcoin and Ethereum could enjoy limited widespread adoption.

However, the new EU legal framework is much kinder to collateralized fiat digital assets, popularly known as stablecoins.

According to the European Commission, it would take a more lenient approach toward the supervision of regulated stablecoins, which seemed acceptable to most of its members.

When Will New EU Rule Take Effect?

The bank-capital regulatory policy requires more approval from member states in the EU’s council and parliament, which is estimated to take several months.

Additionally, the finalization of the framework aligns with the forthcoming release of the prudential crypto-bank rule book by the Basel Committee on Banking Supervision, expected to be implemented at the beginning of 2025.

The agreement now awaits approval from member states in the EU’s Council and lawmakers, which could take several months.