Global banking regulators, led by the Basel Committee on Banking Supervision (BCBS), are reconsidering their strict capital rules for crypto as regulated stablecoins rapidly gain prominence—and traditional banks are pushing back on the current framework.
What’s changing: A rethink at Basel
- Basel Chair’s warning: Erik Thedéen, chair of the BCBS, recently called for a reassessment of the committee’s crypto capital standards. He highlighted the dramatic growth in stablecoin usage and suggested that the current regulatory treatment may no longer be fit for purpose.
- Punitive risk weights under fire: Under Basel’s current rules, banks holding highly volatile crypto assets—including stablecoins on permissionless networks—are subject to an eye-watering 1,250% risk weight.
- Push from banks: Several major financial institutions have argued these rules are overly harsh and disincentivize banks from engaging meaningfully with regulated stablecoins, especially those backed by liquid, high-quality reserves.
Why the current rules are under scrutiny
- The 2022 Basel crypto framework categorized stablecoins into a special “Group 1b” to offer somewhat favorable treatment—but only if they met stringent requirements, such as being “redeemable at all times” and having supervised issuers.
- The 2023 consultation paper from Basel proposed tightening those criteria, particularly around the reserve assets backing stablecoin issuers (credit quality, liquidity, maturity, etc.).
- Critics—including community banks and industry groups—argue the framework fails to reflect the evolving stablecoin market, where many issuers now hold highly liquid reserves (e.g., U.S. Treasuries) and operate under stronger regulatory oversight.
Who is pushing for reform
- Regulators: Thedéen has signaled that a “different approach” is needed, especially as stablecoins increasingly serve payments and settlement roles, not just speculative use.
- Community banks: Entities like the Independent Community Bankers of America (ICBA) have long cautioned Basel about the risks of crypto, particularly stablecoins, and called for balanced capital treatment.
- Global financial institutions: Some banks argue that the existing risk weights make offering stablecoin-related services economically unviable and are urging Basel to adopt regulatory changes that are “data-driven” and differentiate regulated, well-collateralized stablecoins from more speculative crypto.
Risks and regulatory balance
- The Basel Committee has previously warned that crypto assets remain an “immature asset class” with risks including liquidity, market, and operational risk.
- While easing capital requirements could help banks engage more with regulated stablecoins, regulators face a trade-off: they must balance innovation with ensuring financial stability and preventing risk accumulation.
- Some of the proposed revisions in Basel’s earlier consultations include limiting reserve maturities, requiring over-collateralization, and ensuring stablecoin issuers meet prudential capital and liquidity standards.
- There is also the risk that loosening rules could create regulatory arbitrage: different jurisdictions or types of stablecoins might be treated unevenly, potentially undermining global financial stability.
What happens next
- Regulatory review: Basel may issue updated proposals or amendments to its crypto capital framework in response to the surge in stablecoin adoption and bank lobbying.
- Consultation and feedback: Stakeholders—including banks, stablecoin issuers, and industry groups—are expected to weigh in as Basel reopens discussions.
- Implementation timeline: The final rules (or any adjusted regulatory standard) could be phased in over time. Basel’s current crypto-asset standards are slated for implementation by January 1, 2026 for many jurisdictions.
- National regulators’ role: Even if Basel revises its recommendations, local regulators and central banks will make independent decisions on how and whether to adopt the changes.
Why it matters
- For banks: Looser capital rules on stablecoins could make it more attractive for banks to offer custody, issuing, or settlement services for stablecoins.
- For stablecoin issuers: Regulatory recognition and differentiated treatment could validate their business models and boost adoption.
- For the financial system: Striking the right regulatory balance is vital—enough flexibility to foster innovation, but sufficient safeguards to prevent systemic risk.
Bottom line: The Basel Committee appears poised to revisit its stringent crypto capital standards in light of booming activity in regulated stablecoins and pressure from global banks. What emerges from this review could reshape how banks hold and interact with stablecoins—and influence the future of crypto in traditional finance.
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