EU Proposal Aims to Lower Risk for Stablecoins, Tokenized Assets

EU Proposal to Lower Risk Weight for Stablecoins

• The European Commission has proposed a risk weight adjustment to facilitate commercial lenders’ inclusion of stablecoins and tokenized assets.
• The proposal suggests lowering the risk weight from 1,250% to 250% for stablecoins tied to non-fiat assets like gold.
• Banks must manage risks associated with holding cryptocurrencies such as cybersecurity, money laundering, and valuation issues.

Background

The European Parliament had called for banks to hold one euro of capital for every euro of crypto, but the European Commission is now proposing a more balanced approach in order to prevent potential crypto turmoil from affecting the commercial banking system. This proposal follows an April 18 meeting among negotiators and will be reconciled with the forthcoming Markets in Crypto Assets regulation (MiCA). The MiCA seeks to regulate stablecoin issuers and mandates appropriate reserves.

Risk Weight Adjustment

The proposed risk weight adjustment would lower the maximum capital requirement for lenders when dealing with stablecoins and tokenized assets. Bitcoin (BTC) and Ethereum (ETH) would still carry the maximum risk weight of 1,250%, while tokenized assets and stablecoins backed by fiat currencies would be treated similarly unless additional credit or market risks exist. Additionally, supervisors must ensure banks properly manage risks associated with holding cryptocurrencies such as cybersecurity, money laundering, and valuation issues.

Potential Impact

This cautious approach has raised concerns in the traditional finance sector due to potential increased risks to financial stability if a regulatory framework isn’t established to address risks from exposure to crypto-assets. Banks could face amplified risks due to transmission channels between crypto-asset markets and financial markets that could potentially lead them into deep trouble if not managed well.

Conclusion

The Commission plans have finalized its proposals after 2023 once global standards are in place. This comes as lawmakers seek a balanced regulatory approach for crypto holdings as part of broader banking reforms that aim to prevent potential crypto turmoil from impacting commercial banking systems across Europe.