Citi UK Head Warns 1,250% Crypto Risk Weight May Drive Activities Unregulated

Citi UK's Tiina Lee, the UK country head for Citi, has expressed concerns over the current regulatory capital treatment of crypto holdings on bank balance sheets. Speaking at TheCityUK’s annual conference in London, Lee highlighted the global banking rule that assigns a 1,250% risk weight to any crypto assets held by financial institutions. This regulation, set to come into effect next year, would make it prohibitively expensive for banks to hold digital assets, as it would require them to maintain a capital position of 125 for every 100 units of their crypto exposure, assuming a 10 percent capital ratio.

Lee warned that such stringent regulations could drive crypto activities into unregulated spaces, rather than fostering safe and supervised participation within the banking system. She argued that while the intention behind these regulations is to protect the financial system, the outcome could be that digital assets are managed in less supervised environments. Lee believes it would be more beneficial for these assets to remain within a framework where appropriate oversight and supervision are applied.

Lee's remarks come at a time when international financial institutions are reviewing their stance on crypto as its adoption intensifies. Regulators have been cautious, citing concerns about volatility, fraud, and systematic risk. However, banking executives like Lee are advocating for a middle ground that would allow regulated institutions to participate in the digital asset economy. Other stakeholders have also claimed that regulation should encourage responsible involvement in the banking sector, as barring regulated firms from crypto exposure could lead to a loss of control over the market to unregulated operators.

Support for broader institutional participation in crypto markets has also gained political traction. The Trump administration in the United States supported policies favorable to the growth of digital assets, reinforcing the view that crypto may become a more accepted asset class in traditional finance. As more governments consider regulatory clarity and infrastructure support for digital assets, banks are evaluating their potential roles in this ecosystem. Without updated rules, banks may be left behind while alternative finance players take on larger roles in crypto-based services, products, and investment vehicles.

In response to these developments, the United Kingdom published a bill proposal in April to regulate digital asset companies, aligning them with conventional financial norms. This proposal focuses on exchanges, custodians, and stablecoin issuers, with an emphasis on transparency, consumer protection, and operational robustness to foster trust and innovation within the market. UK Chancellor Rachel Reeves presented the framework at a summit on fintech, with further legislation announced after consultation with the industry. This action is part of a broader plan to open Britain to international investment in fintech.