El Salvador recently became the first country to officially declare Bitcoin as its legal currency.
On the other hand, many countries have recently seen that their local banks are facing a threat from the largest cryptocurrency in the world.
The rise in cryptocurrency adoption has been accompanied by regulators who take the fast-growing market seriously.
Banks will now face even more difficult times, especially with the apparent race between individuals and institutions to increase the holdings of Bitcoin and other cryptocurrencies.
Accordingly, this committee placed Bitcoin at the top of the highest risk category.
The above-mentioned committee includes a group of countries and international institutions as its members.
The Basel Committee is not alone in seeing things from this angle. Recently, a BIS official commented that the Bitcoin policy in El Salvador is an interesting experiment.
Additionally, the committee suggested applying a 1250% risk weight to the bank’s exposure to bitcoin and some other cryptocurrencies.
According to Bloomberg estimates:
In practice, this means that a bank may need to hold a dollar of capital for every dollar of bitcoin.
This is based on a minimum capital requirement of 8%.
In addition, stablecoins and other tokens associated with real-world cryptocurrencies are set for lower capital requirements.
The report added:
The capital would be sufficient to absorb a complete writedown of cryptocurrency exposure without exposing depositors and other major bank creditors to a loss.
The proposal did not specify any specific timetable, so implementation of these rules could take a few years.
However, the proposal is open for public comment before it enters into force.
It should also be noted that the committee said that initial policies are likely to change several times as the market develops.
Although banks like HSBC have been wary about getting into cryptocurrency trading, a few big names, like Standard Chartered Plc, have announced their entry.