1,250% risk weight for unbacked crypto may curb institutional adoption across Europe
European banks face new regulatory hurdles as the European Banking Authority enforces strict capital requirements for crypto holdings.
The European Banking Authority (EBA) has finalized its long-awaited rules requiring banks to apply a 1,250% risk weight to holdings of unbacked cryptocurrencies like Bitcoin and Ether. The regulation is part of the Capital Requirements Regulation (CRR III) framework and became effective in July 2024.
“This framework ensures harmonization across the EU and clarifies how capital should be allocated for crypto exposures,” the EBA stated in its final draft.
Unbacked crypto assets, classified under Group 2b, are considered high-risk and will demand significantly more capital to be held by banks. Group 2a, which includes similar assets that meet hedging and netting criteria set by the Bank for International Settlements, will also be subject to heightened scrutiny.
Group 1b, which refers to asset-referenced tokens, will receive a 250% risk weight, highlighting the regulator’s tiered approach based on asset stability and backing.
“These rules make it nearly impractical for banks to carry significant positions in volatile digital assets without heavily impacting their capital ratios,” noted a European financial compliance expert.
A key feature of the final draft is the strict separation of assets, meaning Bitcoin and Ether cannot offset each other in risk models. This eliminates the possibility of reducing exposure through portfolio balancing, a method commonly used in traditional asset management.
As an example, Italian bank Intesa Sanpaolo, which disclosed a €1 million Bitcoin purchase earlier this year, would now be required to hold €12.5 million in capital under the new standards.
Meanwhile, firms like Revolut are likely to remain unaffected, as their crypto operations are managed through non-banking subsidiaries and remain off-balance-sheet.
These capital rules appear to diverge from global regulatory trends. In contrast, the U.S. and Switzerland are introducing frameworks that integrate digital assets into traditional finance with fewer restrictions.
“This could create a competitive gap between EU and non-EU banks when it comes to digital asset innovation,” warned a policy researcher monitoring crypto regulation in the G20.
As the digital asset market evolves, the EBA’s conservative approach may limit European bank participation just as other jurisdictions begin to embrace blockchain finance.
Disclaimer
This content is for informational purposes only and does not constitute financial, investment, or legal advice. Cryptocurrency trading involves risk and may result in financial loss.