Banks Warn Basel: Crypto Capital Rules Risk Choking Innovation

Major trade groups and financial industry organizations have joined forces to urge the Basel Committee on Banking Supervision (BCBS) to reassess its capital rules for cryptoassets, warning that the proposed standards could hinder bank participation in the crypto sector. In an open letter, the groups emphasized that the current regulatory framework imposes overly conservative and punitive capital requirements, which significantly reduce banks' return on equity (ROE) and make engaging in crypto-related activities economically unviable [1].

The letter, signed by entities such as the Global Financial Markets Association (GFMA), the Institute of International Finance (IIF), and the International Swaps and Derivatives Association (ISDA), argues that the 2022-established Basel standard—known as the Cryptoasset Exposures Standard (SCO60)—fails to align with the actual risk profiles of cryptoassets. The signatories are calling for a temporary pause in the implementation of SCO60, which is set to take effect in January 2026, to allow for a thorough consultation and potential redesign [2].

The industry groups contend that the capital treatment of cryptoassets under the current framework is misaligned with the risks they pose and inconsistent with current market risk management practices. They assert that the standard’s restrictive qualification criteria and excessive capital requirements push innovation outside the regulatory perimeter and threaten to stifle responsible innovation in financial services. The letter also highlights the need for prudential frameworks to be technology-neutral, focusing on the underlying financial activity and risk rather than the specific technology used [2].

A complementary report titled “The Impact of DLT in Capital Markets: Ready for Adoption, Time to Act” underscores the growing role of distributed ledger technology (DLT) in reshaping capital markets. The report demonstrates that tokenization and DLT are enabling significant efficiency gains in securities issuance, collateral management, and fund operations. It also notes that the increasing size and significance of the cryptoasset market have rendered many of the assumptions underlying the Basel standard outdated [2].

According to the report, DLT is accelerating in institutional adoption, with tokenized money market funds and digital bond issuances gaining global traction. It emphasizes the importance of regulatory reform keeping pace with the development of DLT-based finance and highlights how DLT enables safer, more efficient markets through faster settlement times, improved liquidity, and enhanced operational resilience. The report identifies six priority areas for ecosystem development, including accelerating market development in high-potential asset classes, establishing interoperability, and fostering public-private coordination [2].

The Basel Committee, which sets banking standards for global financial institutions, lacks direct enforcement power but influences how international banks operate within member jurisdictions. The proposed capital rules for cryptoassets were shaped in response to the 2022 collapse of major crypto firms, which exposed systemic risks and prompted calls for tighter regulation. However, the industry groups argue that the current approach risks stifling innovation and creating an imbalance between regulatory rigor and the potential benefits of crypto and DLT in modernizing financial infrastructure [2].

As regulatory uncertainty continues, the industry is calling for a recalibration of the current capital framework to support responsible innovation while ensuring financial stability. The outcome of this lobbying effort could shape the future landscape of crypto banking and influence how financial institutions integrate blockchain-based technologies into their operations.

Source:

[1] Basel Bank capital rules create 'chokepoint' for crypto (https://cointelegraph.com/news/basel-bank-capital-rules-create-chokepoint-crypto)

[2] Joint Trades Call for Recalibration of Cryptoasset Prudential Standards and Highlight DLT's Transformative Role in Capital Markets (https://bpi.com/joint-trades-call-for-recalibration-of-cryptoasset-prudential-standards-and-highlight-dlts-transformative-role-in-capital-markets/)