EU Banks Face 100% Collateralisation of Crypto Assets

EU banks face strict crypto rules in new published legal draft

EU banks would be required to apply the highest possible risk weight on cryptocurrency assets, according to a draft rule that was released by the European Parliament on Friday, February 10.

This isn't new news, but the risk weight of 1,250% that is being suggested for holding crypto needs a bit of explaining.

This assumes that the capital requirement is 8%; this is fractional reserve banking at a ratio of 12.5 to 1 - not the 10 to 1 many people still assume.

So if an asset is given a risk weight of 100% this means a bank should also hold 8% of that in reserve, on top of the asset itself. Many government bonds are given a 0% risk weight, while AAA bonds might be 20%.

So, what 1,250% means is that when we multiply this by the capital reserve requirement of 8% we get the magic number of 100%. And what that means is that banks would have to hold in reserve the total value of any crypto held, on top of the crypto itself. This means that holding $1m in BTC requires also holding $1m as capital reserve.

In crypto-speak, every crypto asset held by a bank would have to be 100% collateralised by the same value in non-crypto assets.

Not exactly an incentive; which is the whole point of this genius bit of draft legislation.