Summary

• EU Parliament votes for strict restrictions on banks holding crypto.
• Banks must hold one euro of capital for every euro of crypto held.
• Concerns about the scope of the amendment and potential impact on tokenized securities.

The Economic and Monetary Affairs Committee of the European Parliament has voted to impose strict regulations on banks that hold cryptocurrency. The measures, which were leaked and reported by CoinDesk, aim to set standards before the European Commission introduces more comprehensive rules.

According to Markus Ferber, the economic spokesperson for the parliament's largest political group, banks will be required to hold one euro of capital for every euro they hold in crypto. This is a significant increase in the amount of capital that banks must hold and will serve as a deterrent for banks to hold large amounts of cryptocurrency. The move is intended to prevent instability in the cryptocurrency market from affecting the financial system.

The Association for Financial Markets in Europe (AFME), a lobby group representing traditional finance organizations such as investment banks, has raised concerns that the scope of the amendment may be too broad. They have pointed out that there is no clear definition of what constitutes a "crypto asset" in the legislation and therefore the requirement may apply to tokenized securities as well as traditional cryptocurrency assets. AFME has called for drafting issues to be dealt with later in the legislative process.

The move mimics rules set out by the Basel Committee on Banking Supervision, an international standard-setter for the banking industry, which has proposed that holdings of unbacked crypto should be given the highest possible risk weighting and also be limited as a proportion of a bank’s total issuance of core financial instruments. This is a reflection of the growing concern among regulators and financial institutions about the potential risks associated with cryptocurrency investments.

In order for these measures to pass into law, they still need approval from the European Parliament and also have to be negotiated with national finance ministers who meet in the Council of the European Union (EU), as part of a fuller package of bank capital reforms. This process is expected to take several months and it remains to be seen whether the final legislation will be as restrictive as the initial proposal.