The Basel Committee on Banking Supervision issued its second consultation on the prudential treatment of the crypto asset exposure. One of its proposals seeks to set a cap for Bitcoin holding at 1%.
Basel Committee divides crypto assets into 2 groups
The global crypto market has tumbled by a huge number over the past few weeks. This was triggered by the collapse of Terra’s native token LUNA and Stablecoin UST. In order to prevent every potential risk to the financial system, Basel Committee has landed this proposal.
The proposal highlighted that the basic structure from the first consultation has been maintained. The crypto assets have been divided into two groups.
The first group includes eligible treatment under the existing Framework with modification. While the second one holds unbacked crypto assets and stablecoins with ineffective stabilisation mechanisms. This group will be subject to a new conservative prudential treatment, it added.
BTC holding limits to 1%
As per the proposal, there will be no large exposure limit on any digital asset where there is no counterparty. It mentioned Bitcoin (BTC) as an example. Basel Committee suggests putting a new exposure limit over the second group.
A provisional limit of 1% of the Tier 1 capital will be set. However, it will be reviewed periodically. In the view of big banks like JP Morgan Chase, this 1% can amount anywhere in billion dollars. The Bitcoin prices have dropped immensely since the beginning of the year. It is trading at an average price of $19,100, at the press time.
Meanwhile, the first consultation proposed that banks need to hold enough capital to cover any loss over BTC holdings.
However, the report said that witnessing the rapid growth and Volatile nature of the Crypto market, they will be closely monitoring it during the consultation period. Rules can be tightened If any shortcomings in the consultation proposals or new risk elements emerge ahead. While the committee will be open for comments by the end of September.
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