BIS Allows Banks to Hold 2% of Reserves in Crypto
Those who love crypto are always excited whenever there is news that hints at more crypto adoption. This is especially true when this news is related to industries that typically exclude cryptocurrency.
As such, many will be happy at the latest news coming from the Bank of International Settlements. The institution just released its Prudential Treatment of Cryptoasset exposure report for 2022, and in it, there is an innovative new policy. This new policy stipulates that banks can hold up to 2% of their reserves in cryptocurrency.
How This New Policy Benefits the Industry
This is not the first time that the BIS is dealing with the crypto world as it held consultations over the summer regarding the issue of bank reserves. Back then, the BIS’s consultations suggested that banks could keep up to 1% of their reserves as crypto. Now, it has been increased by a percentage point and this new policy will go into effect in 2025.
This is a significant development, first, because it means that the banking industry may interact more closely with the crypto industry. Anyone who’s been following the crypto industry for years will tell you that the banking sector has not always been very favourable to it. Crypto businesses have had their bank accounts closed without warning, consumers have struggled to use bank cards to access crypto services, and in the UK, several top banks are about to implement harsh restrictions related to crypto. Needless to say, this could help ease this historically strained relationship.
The document also goes on to outline two different categories of crypto assets. The first group is the tokenized traditional assets that have a stabilization mechanism. These assets will be subject to the requirements that already exist in the Basel capital framework. The other category is where the new policy is focused on and comprises crypto assets that don’t meet the requirement to be included in the first category.
“Certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increase, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering/terrorist financing risk; and legal and reputation risks,” the document said, highlighting some of the common concerns regarding cryptocurrency.
Because these assets don’t have a stabilization mechanism, they are considered to be a higher risk and as such, they need specialized laws. But with this new policy, we will likely see more banks begin to hold reserves in cryptocurrency.
Banks and Crypto
This policy is one that can potentially drive adoption and unite the traditional and crypto worlds. The two have been at odds for a long time but if banks have some of their reserves in cryptocurrency, they will be incentivized towards creating pro-crypto internal policies.
And because reserves will be capped at 2%, their exposure to the infamous volatility of the crypto industry will also be minimized and avoid adverse effects during market downturns.