Bank for International Settlement (BIS) allows banks to hold up to 1% of reserves in cryptocurrencies

• The BIS extends a helping hand to the struggling crypto market.
• The global apex bank remains skeptical about cryptocurrencies.

The skepticism of the bank for international settlement (BIS) towards cryptocurrencies rose further following the current crypto winter. However, the bank has made a move to help the struggling industry. It now allows banks to have not more than 1 percent of their reserves in digital currencies, including Bitcoin (BTC).

A June 30 report by the BIS’ Basel Committee on Banking Supervision (BCBS) suggested that banks’ total exposure to “Group 2 digital assets” should be capped at 1 percent of their core capital. The BCBS included this suggestion in its recently released document known as “second consultation on the prudential treatment of crypto-assets.”

Classifying crypto assets

The BCBS used certain criteria to classify crypto assets. Hence, all crypto assets are classified into two Groups. Those crypto assets that fail to meet these criteria are classified into Group 2. However, others that meet those criteria are classified into Group 1.

Hence, Group 2 crypto assets consist of stablecoins, unbacked crypto assets, and tokenized traditional assets that didn’t meet those criteria. In contrast, Group 1 crypto-assets have the same assets mentioned above but meet the BCBS criteria.

The document reads, “there is a limit to bank’s exposures to Group 2 crypto assets. Banks must apply this limit to their cumulative exposure to Group 2 crypto assets.” The report adds that this cumulative exposure is their direct and indirect holdings. The direct holdings include cash and derivatives, while indirect holdings include special purpose vehicles, investment funds, and ETF or ETN.

The document also states that a bank’s exposure to these crypto-assets must never be over 1 percent of its core capital at any point in time. This requirement is part of the BCBS standards and aligns with the Basel framework.

The Basel framework’s large exposure rules do not cover huge exposures to a specific asset. Instead, it covers exposure to separate counterparties or Groups of common counterparties. Thus, a bank can have huge exposure limits on crypto assets so long there is a counterparty like bitcoin.

Using this basis, the committee suggested the introduction of a new exposure limit for other Group 2 crypto assets to which the large exposure rules do not apply. However, the BIS will review this 1 percent limit now and then.

BIS’ skepticism about crypto

As widely reported in various media, the BIS uses the current crypto winter to prove its skeptical stance toward crypto-assets further. It also states that its forecast concerning decentralized finance (DeFi) risks will soon become a reality.

You’d recall that the BIS issued a report early last month stating its reasons why cryptos can’t perform money’s social role. High fees, network congestion, and landscape fragmentation are the reasons the BIS gave to support its opinion.