The European Commission is considering measures to integrate stablecoins and tokenized assets within the banking sector. This is evident from a leaked document in the hands of Coindesk. These plans are in stark contrast to previous initiatives that aimed to make people transparent about their crypto assets.
European Commission calls for appropriate regulation
The proposal spells out the requirements for banks to own fiat currency relative to crypto assets. This is a relaxation from the previous proposal in January, which required banks to back their crypto assets with significant amounts of fiat currency. The document suggested the following:
“If there is not an adequate regulatory framework in place to address the various risks banks face from this new form of exposure, there is a risk that the connections between crypto asset markets and financial markets will grow in size and impact. This can lead to greater risks for financial stability and individual banks.”
A lower risk weight for stablecoins
European Union (EU) legislators have indicated their intention to introduce stricter regulations for cryptocurrencies. This is mainly done to prevent the instability in the crypto industry from spilling over into the commercial banking system. Their plan includes assigning a risk weight of 1250%. A risk weight is related to the amount of capital a bank must hold relative to the amount they lend. A higher percentage provides more security, but also limits the borrowing capacity of the bank, which can lead to less economic activity.
The European Commission’s new proposal is to increase the risk weight of stablecoins decrease to 250%. It is also suggested to link the digital currencies to non-fiat assets such as gold. In addition, the banks must also be closely monitored to ensure that crypto transactions are not connected to illegal practices such as money laundering. Other non-stablecoins such as bitcoin (BTC) and ethereum (ETH) will still have to do the 1250% risk weight due to their volatility.