The Stablecoin Surge Prompts Basel Committee to Rethink Banking Regulations

The rapid growth of stablecoins is pressuring U.S. banks and regulators to urge the Basel Committee to reassess its strict capital requirements for crypto assets.

Key Takeaways

The rise of stablecoins is prompting the Basel Committee to reconsider its strict capital requirements for crypto assets.
Stablecoins, despite being marketed as lower-risk, are subject to the same stringent regulations as volatile cryptocurrencies.
Banks currently need to reserve substantial capital against crypto holdings, making direct involvement economically unfeasible.
Intense pressure from financial institutions and differing international regulatory approaches are pushing for reform in current regulations.
The Basel Committee plans to revise its rules next year to better accommodate banks in crypto markets.

Stablecoin Boom Forces Basel Committee to Rethink Punishing Bank Rules

Even though stablecoins are promoted as safer digital currencies, they are currently treated with the same stringent regulations as more volatile cryptocurrencies under existing Basel rules.

In an interview with Financial Times, Erik Thedéen, chair of the Basel Committee on Banking Supervision, acknowledged that a recalibration of the global framework is necessary.

Nonetheless, he pointed out that differing opinions among international regulators complicate the quest for a unified approach.

Currently, regulations require banks to hold significant capital reserves against potential losses associated with crypto assets.

With resistance from both the U.S. and U.K. to embrace these standards, the rise of stablecoins has amplified calls for a reform of these regulations.

“What has happened has been fairly dramatic,” Thedéen commented, emphasizing the urgent need for a new regulatory perspective due to the growing relevance of stablecoins.

Stablecoin Boom Forces Basel Committee to Rethink Punishing Bank Rules

USDT and USDC: Classified as High-Risk Assets by Basel

The Basel Committee imposes a staggering 1,250% risk weight on banks’ holdings of unbacked crypto assets, like Bitcoin and Ethereum, labeling them among the riskiest assets under global banking standards.

These rules, finalized three years ago, are set to take effect on January 1.

Under this regulation, banks must reserve $1.25 in capital for every $1 of crypto they possess, making direct engagement with crypto economically unfeasible for most banks.

As a result, financial institutions have largely refrained from holding or providing loans against these assets, keeping them off institutional balance sheets.

What was intended as a protective measure is now being revisited as the use of stablecoins expands and different major economies pursue varied regulatory paths.

The Federal Reserve Rejects Basel's Capital Rules

Last year, the Basel Committee revised its standards, enforcing maximum capital restrictions on all crypto assets operating on permissionless blockchains.

This revision applies to popular stablecoins like Tether’s USDT and Circle’s USDC, both falling under the 1,250% risk weighting.

“The focus back then was very much on the bitcoins of this world,” Thedéen explained.

“Now, everyone is discussing stablecoins. Are permissionless ledgers as risky as we initially thought? Or can we view them differently? We need to begin analyzing this, and we must act quickly.”

Financial institutions are increasingly pushing for changes to these standards.

In August, Wall Street groups reached out to the Basel Committee, warning that the current crypto regulations render bank participation in digital asset markets economically impractical.

According to the Financial Times, the U.S. Federal Reserve, represented by Michelle Bowman, the Fed’s vice-chair for supervision, announced last month that the Basel risk weights will not be implemented due to a lack of practical grounding.

The Bank of England has also decided against adopting the rules in their current form, as reported by sources.

Japan has joined this pushback as well.

In a Tokyo interview with Central Banking, Minoru Aosaki, head of the international office at Japan’s Financial Services Agency, confirmed that Japan will not follow the Basel Committee’s crypto asset standards.

While the EU has integrated some parts of the framework, it has excluded sections related to permissionless ledgers and their capital requirements.

Anticipated Overhaul of the 2022 Basel Framework

Bloomberg reports that the Basel Committee plans to revise its 2022 framework next year to provide more favorable terms for banks engaging in crypto markets.

Many banks perceive the existing regulations as actively deterring their involvement in cryptocurrency and stablecoin services.

Nevertheless, Thedéen emphasized that reaching regulatory consensus remains a challenge due to fundamental disagreements about the level of risk posed by crypto and the role of bank-issued digital currencies.

“Going further than that right now is difficult, as I lead a committee with many differing viewpoints,” he remarked.