The European Union is imposing stricter and broader cryptocurrency legislation

European Union lawmakers have approved several changes, including new, stricter requirements for banks that deal with cryptocurrencies and digital assets.

The European Parliament’s Economic and Monetary Affairs Committee voted on the question that would put these restrictions in place.

The measure was taken to limit the number of unbacked loans using Bitcoin (BTC) and Ethereum (ETH) that lenders can hold before the European Commission. Settlements between the parties will require banks to hold more capital to protect customers from crypto losses.

The legislation will trigger other notable components of the Basel III international regulatory framework. Basel III is an internationally agreed set of procedures developed by the Basel Committee on Banking Supervision.

The Basel III component will enhance the financial framework by approving strong capital requirements. Specifically, these measures were adopted to include a requirement for banks to disclose if and how they have exposure to cryptocurrency.

The new rules will need to be approved by the European Parliament and EU finance ministers for the measure to become law.

Financial capital requirements for banks dealing with cryptocurrencies

The proposed amendment states that banks should apply a risk weight of 1,250% to exposure to crypto assets. This law will cover the financial capital requirements of traditional enterprises. This amendment means that when the rules come into effect, banks must be responsible for covering their total capital reserves and not gaining leverage.

This proposed percentage is the highest level of securitization included in the Basel III reforms put in place by the committee.

The committee set limits on the amount of capital a bank can offer for crypto assets; These standards will be implemented by the beginning of 2025.

Markus Ferber, economic spokesman for the largest political grouping in parliament, said in a statement:

Banks will be required to hold euros of their capital for every euro they hold in cryptocurrencies. These exorbitant capital requirements will help prevent instability in the crypto world from spilling over into the financial system. Over the past two years, we have seen that crypto assets are high-risk investments.

Caroline Lesgang, Head of Prudential Regulations at the Association of Financial Markets in Europe (AFME), stated:

Parliament has taken positive steps forward by making changes to the Commission’s legislative proposal which should be given due consideration during the negotiations between the institutions.

Crypto Lobby Group Opinions

The Association of Financial Markets in Europe (AFME) is a pressure group that works mainly on behalf of traditional financial institutions such as investment banks with differing opinions. They have concerns that the scope of this adjustment may be too wide.

AFME stated in an email:

There is no definition of cryptographic assets in file [legislation] Thus the requirement may apply to tokenized securities, as well as non-traditional crypto assets targeted for temporary processing.

The organization said that drafting issues could be better dealt with later in the legislative process.