BIS Greenlights Banks to Hold 1%-2% in Crypto

Commercial banks across the world can now hold between 1% and 2% of their tier 1 capital in crypto following a decision by the Basel Committee’s oversight body.

The Group of Central Bank Governors and Heads of Supervision endorsed a finalized prudential standard on banks’ cryptoassets exposures on Friday.

That standard classifies cryptos into tokenized stocks/bonds and stablecoins (traditional assets), which don’t have a limit, and actual cryptos like bitcoin or eth.

For the latter, “a bank’s total exposure to Group 2 cryptoassets should not generally be higher than 1% of the bank’s Tier 1 capital and must not exceed 2% of the bank’s Tier 1 capital,” the standard says.

JP Morgan has the biggest Tier 1 capital at $263 billion, so they can hold $2.6 billion in crypto.

Capital One on the other hand has Tier 1 at just $28 billion, so they can hold only $280 million worth of crypto.

However exceptions are made if crypto is being held as a hedge. So if the bank is selling long bitcoin futures on CME, and buys spot bitcoin to hedge that long in case the price does go up, this bitcoin does not count as part of this reserve requirement.

In addition, the custody of customers’ crypto does not appear to count either, making this more about banks’ own assets.

Some studies have found that some exposure to crypto provides higher risk-adjusted returns in the modern portfolio theory.

In 2018 when these studies first started reporting their findings, they recommended that at least 1% of the portfolio should go towards bitcoin.

In later years some studies have increased that recommendation to 10%, but the Basel Committee appears to now be green-lighting that 1%.

Banks can increased the threshold to 2% under stricter conditions, with this decision so potentially paving the way for a greater integration between crypto and the traditional financial system.