EU Plan to Reduce Stablecoin Risk Weight

EU Plan to Reduce Stablecoin Risk Weight

The European Commission proposes risk weight adjustments for stablecoins and tokenized assets to facilitate commercial lenders’ inclusion of digital assets and counter lawmakers’ efforts to discourage crypto holdings as part of broader banking reforms.

  • Efforts have been made to ease restrictions on cryptocurrency holdings as part of broader banking reforms.
  • Lawmakers have sought to prevent potential cryptocurrency turmoil from impacting the commercial banking system.
  • Proposed danger weight adjustments for crypto stablecoins and tokenized assets have aimed for a balanced regulatory approach.

The European Commission aims to support commercial lenders’ inclusion of crypto stablecoins and tokenized assets, countering efforts by lawmakers to discourage cryptocurrency holdings as part of broader banking reforms. 

EU Seeks to Prevent Cryptocurrency Turmoil from Affecting Banks

A leaked document has revealed the Commission’s intent to moderate the European Parliament’s strict stance, which was known for banks to hold one euro of financial resources for every euro of crypto. 

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Lawmakers from the European Union (EU) seek to prevent cryptocurrency turmoil from affecting commercial banking by imposing a 1,250 percent danger weight on digital assets, creating a maximum financial resources requirement for lenders.

The Commission’s proposition, following an April 18 meeting between negotiators, suggests reducing the danger weight to 250 percent for crypto stablecoins tied to non-fiat assets like gold. Tokenized assets and crypto stablecoins backed by fiat currencies would be treated similarly unless additional credit or market dangers exist. 

This aligns with the following Markets in Cryptocurrency Assets regulation (MiCA), effective July 2024, which regulates crypto stablecoin issuers and mandates appropriate reserves.

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The leaked document is warning of increased dangers to financial stability if a regulatory framework isn’t established to address dangers from exposure to crypto-assets. Banks could face amplified dangers owing to the transmission channels betwixt the crypto- investment and financial markets. 

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The proposition requires supervisors to secure banks properly manage dangers associated with holding digital currencies, such as cybersecurity, money laundering, and valuation issues.

Bitcoin (BTC) and Ethereum (ETH) would still carry the maximum danger weight of 1,250%. This cautious approach has raised concerns in the traditional finance sector. 

The proposals anticipate detailed cryptocurrency standards from the Basel Committee on Banking Supervision. The Commission intends to finalize a more comprehensive strategy after 2023, once worldwide standards are in place. 

The proposals must be reconciled with the EU member states’ text to become law, typically through closed-door negotiations facilitated by the Commission.

The other side

  • Easing access to crypto stablecoins and tokenized assets for commercial lenders may expose the banking system to increased dangers associated with cryptocurrencies’ volatile and relatively unregulated nature.
  • Reducing the danger weight for crypto stablecoins tied to non-fiat assets can potentially undermine the financial system’s stability, as the value of such assets can be subject to whole lot of fluctuations.
  • Traditional finance sector representatives caution that the conservative regulatory approach towards digital currencies could impede innovation and hinder the expansion of crypto-related business activities in the short term.
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Why This Matters

The leaked proposition, if implemented, could expand the accessibility and acceptance of digital assets within the traditional banking system, fostering increased integration and potentially fueling further growth and adoption of cryptocurrencies.

To learn more about how Tether (USDT) strengthens its crypto stablecoin reserves through Bitcoin investment, read here:

Tether (USDT) Strengthens Crypto Stablecoin Reserves with Bitcoin Investment

To stay updated on the past few decline in USDT usage, reaching a four-year low regardless of recording high market cap, read here:

USDT Usage Plummets to 4-Year Low Regardless of Record Market Cap


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