Banks' Capital Rules When Holding Crypto Need to Be Reworked, Says Basel Chair: FT

2 hours ago7 min read1 comments

The global financial establishment's cautious dance with digital assets has hit another critical inflection point, with Pablo Hernández de Cos, the chair of the Basel Committee on Banking Supervision, declaring that the current capital rules for banks holding crypto need a significant rework. This isn't just a minor regulatory adjustment; it's a stark admission that the initial framework, designed to corral the wild volatility of the crypto frontier, may have been overly punitive, potentially stifling the very innovation that could bridge the multi-trillion-dollar gap between traditional finance (TradFi) and decentralized finance (DeFi).The existing Basel standards, which came into full effect at the start of 2024, essentially treat unbacked cryptocurrencies like Bitcoin with extreme prejudice, assigning them to the highest possible risk bucket and demanding banks hold a capital reserve of one-to-one—meaning for every dollar of Bitcoin on their balance sheet, they must have a dollar of capital set aside. This 'risk-free' capital requirement, while understandable from a conservative risk-management perspective, has acted as a powerful deterrent, preventing major banks from diving headfirst into crypto custody and trading services.De Cos's comments to the Financial Times signal a recognition that this blanket, draconian approach might be preventing the development of a safer, more regulated on-ramp for institutional capital, precisely at a time when spot Bitcoin ETFs have already legitimized the asset class for millions of mainstream investors. The rework will likely focus on creating a more nuanced, graduated system that distinguishes between the raw, un-backed speculative assets and the burgeoning world of tokenized real-world assets (RWAs), where a bond, a real estate deed, or a commodity is represented on a blockchain.This is where the true synergy lies; a bank holding a tokenized U. S.Treasury bill should not be penalized as if it were holding a memecoin. The Basel Committee's pivot suggests a maturation in their understanding, moving from viewing crypto as a monolithic threat to appreciating its technological stratification.The implications are profound. For banks, a more favorable capital regime could unlock billions in dormant institutional demand, transforming crypto from a niche, high-cost compliance headache into a viable new asset class for their wealth management and treasury operations.For the crypto market, it represents the final piece of the regulatory puzzle for full-scale TradFi adoption, potentially leading to deeper liquidity, reduced volatility, and a new wave of sophisticated financial products built on blockchain rails. However, this path is fraught with complexity.Regulators will have to meticulously define what constitutes a 'safer' crypto asset, likely creating new categories for sufficiently decentralized and liquid assets versus those with weaker fundamentals. They must also contend with the persistent risks of the space: the opaque connections within the crypto ecosystem, the potential for smart contract vulnerabilities, and the ever-present specter of operational failures like the FTX collapse.The re-calibration will be a tightrope walk—making the rules prudent enough to protect the global banking system from contagion, yet pragmatic enough to not cede this entire financial future to the unregulated shadows. The outcome of this Basel rethink will ultimately set the tone for the next decade of finance, determining whether banks become the primary custodians of the digital asset economy or remain hesitant spectators on the sidelines.

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