BIS Allows Banks to Hold 2% Of Their Reserves in Cryptocurrencies

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BIS Allows Banks to Hold 2% Of Their Reserves in Cryptocurrencies
  • BIS has released its Prudential Treatment of Crypto Asset exposure report for December 2022. 
  • From Jan 1 2025, banks can hold 2% of their reserves in cryptocurrencies.
  • The report warns banks that  non-compliance of AML or CFT laws can cause operational losses.

The Bank for International Settlements (BIS) has now allowed banks to now hold 2% of their reserves in cryptocurrencies as per its recently released Prudential Treatment of Crypto Asset exposure report for December 2022. In June, the BIS  had allowed only a few banks to hold not more than 1% of their reserves in cryptos.

The policy which will be effective from January 1st, 2025, also defines crypto assets and the manner in which they can be processed. 

The report has categorized cryptocurrencies under groups called Group 1 and Group 2. The Group 1 asset includes tokenized traditional assets and digital assets which have effective stabilization mechanisms. Meanwhile, Group 2 has digital assets that do not conform to any of the classification terms and conditions.

Thus, the report suggests that bank’s financial exposures to Group 2 crypto assets must not be more than 2% of the bank’s Tier 1 capital, within their reserves. 

The new policy, thus, allows banks and financial organizations to experiment into different cryptocurrencies to increase their reserves.

The report states:

As a result, the required process has been modified to remove the supervisory pre-approval element; instead, in the final standard banks are required to notify supervisors of classification decisions and supervisors will have the power to override these decisions if they disagree with a bank’s assessment.

As for Central Bank Digital Currencies (CBDCs), the Committee will provide additional consideration to the treatment of CBDCs as they are issued. 

The report also warns that in case banks comply with AML or CFT laws (including sanctions) inadequately, then that could result in operational losses as well as reputational damages for such financial institutions.

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