European banks must already limit their crypto, says ECB

The European Central Bank (ECB) has long been very cautious about bitcoin (BTC) and other cryptocurrencies. The central bank considers the young market to be risky. Talks are already underway about limiting the amounts banks are allowed to invest in crypto. These have not yet been completed, but the ECB wants banks to limit their exposure before then.

Crypto restrictions for banks in the future

That writes the ECB in one press release. The institute notes that crypto is extremely volatile, so the “crypto winter” we are now in could pose a huge risk to financial institutions.

Many of the banks that the ECB regulates are at the heart of the European financial system, meaning they have a lot of exposure to each other. If one such institution runs into financial difficulties if their crypto holdings were to fall in value, this could quickly cause problems for other institutions.

Plans are already in place to legally limit banks’ exposure, although these are no more than plans for now. The final plan is expected to be submitted to the European Parliament in July. The Basel Committee is another policy maker for banks. This institute wants banks to invest a maximum of 2% of their capital in crypto by 2025.

crypto brestrictions already in effect?

The ECB wants to go one step further. Banks should start restricting their crypto right now, even though the law has not yet been passed. To be precise, banks must immediately risk weighting of 1,250% for crypto, which means they must have at least the same amount of cash for every amount of crypto they hold.

In addition, this amount may not exceed 1% of their Tier 1 capital. This capital class is where we find the largest part of a company’s capital. The ECB does not specify an exact start date for these measures. Instead, it appears to be a strong warning about crypto’s risks.

The central bank also distinguishes between cryptocurrency and blockchain. Many banks would have stayed away from crypto assets, but they have distributed ledger technology (DLT) tested, for example for tokenizing bonds.

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