Banks worldwide may soon have to back Bitcoin with traditional capital

According to a report from Friday, banks around the world may soon be subject to a new set of rules regarding digital assets. The proposed regulation would divide cryptocurrencies into “Group 1” – which would include assets such as fiat-based stablecoins, and “Group 2” – which would include currencies such as Bitcoin.

Banks may soon have to comply with a new set of rules for cryptocurrencies

A Switzerland-based global forum for making industry rules called the Basel Committee on Banking Supervision is reportedly considering a new set of rules aimed at banks dealing in cryptocurrency. The proposed rules would divide all digital assets into two groups. Generally speaking, banks dealing in “group 1” cryptocurrencies – mostly currencies backed by other assets such as fiat-backed stablecoins – will not be affected by the new regulations.

The so-called “group 2” will include cryptocurrencies that are not backed by any assets of tangible value. A good example of an asset that would fall into this category is the world’s largest cryptocurrency – Bitcoin. If the committee agrees on these rules, any bank that wants to deal with “Group 2” will have to take extra precautions because of their higher volatility.

One of the precautions is that the bank must keep traditional capital equal in value with the “group 2” cryptocurrency – buying $1 million worth of Bitcoin would mean a bank would have to raise $1 million in additional capital. The Basel Committee has actively discussed cryptocurrencies. since 2019. In October 2022, it published a report that found that banks worldwide hold around $9 billion in digital assets.

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Crypto regulation in the wake of LUNA and FTX

While various regulators have been actively pursuing digital asset regulation for years, the dramatic events of 2022 did much to increase the pressure. In May, LUNA collapsed when UST lost its link, sending shockwaves through the industry and leading to several bankruptcies. Along with the billions lost by both private and institutional investors, perhaps the biggest consequence of the crash is a bill that could prevent the issuance of any algorithmic stablecoins for a period of two years.

Recently, Sam Bankman-Fried’s FTX, the world’s second largest crypto exchange, filed for bankruptcy after halting withdrawals due to a severe “liquidity crisis”. The chaos surrounding the collapse only deepened after it was revealed that FTX violated its own terms of service by lending huge sums of its users’ assets to Alameda research, creating a $10 billion hole in its books.

While the ongoing “crypto winter” slowed adoption, the industry grew large enough for the White House to release its first-ever framework for regulating digital assets in September. On December 8, the SEC published new reporting guidelines for companies dealing with cryptocurrencies in response to the recent disasters within the sector.

Despite the turmoil, institutions have also shown increased interest in digital assets. JP Morgan filed an application with the US Patent and Trademark Office to register its own crypto wallet despite its CEO repeatedly disparaging cryptocurrencies and recently comparing them to “pet rocks”.

Do you think the proposed rules for banks could stifle crypto adoption? Let us know in the comments below.

About the author

Tim Fries is the co-founder of The Tokenist. He has a B. Sc. in mechanical engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate in the investment team at RW Baird’s US Private Equity division and is also a co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.