Potential for Global Banks to Custody Cryptocurrencies: Basel Committee on Banking Supervision Considering, Tentatively Classified as Highest Risk Category

Considering that some banks worldwide are seeking to offer cryptocurrency custody services, the Basel Committee on Banking Supervision has issued a public consultation document. In the open custody framework proposed for cryptocurrencies, stricter conditions are recommended compared to stocks and bonds. The market seems to have reacted to this news, with Bitcoin briefly surpassing $38,000.

The Basel Committee for Banking Supervision (BCBS)

To strengthen the stability of the international banking system, the Basel Committee for Banking Supervision (BCBS), a subsidiary of the Bank for International Settlements (BIS), announced an international agreement primarily regulating credit risk in 1988, known as Basel I.

In 1999, a significant revision took place, and Basel II was formally adopted in 2006. To align with the international financial system, most countries and central banks have adopted this framework, commonly referred to as the Basel Committee for Banking Supervision or "BCBS."

Bank Custody of Cryptocurrencies – What are the Conditions?

According to their document, BCBS mentions two types of cryptocurrencies:

• Tokenized assets, stablecoins
• Bitcoin, other cryptocurrencies

Due to high volatility, BCBS classifies Bitcoin as a high-risk asset and proposes a risk weight of 1,250% for Bitcoin, Ethereum, and any other cryptocurrencies. This means that for every $100 of Bitcoin custody, a bank must hold capital equivalent to $100.

Generally, banks must hold a certain amount of capital to cover potential losses from services like loans. Different asset classes have different capital requirements, with real estate having lower requirements than oil ETFs.

Additionally, stablecoins and tokenized assets carry the same risk weight as conventional bonds.

Furthermore, BCBS requires banks to disclose details related to cryptocurrency assets and the primary risks associated with holding such assets, including:

• An overview of the risks that cryptocurrency business may pose
• Risk management policies
• Precautions against cryptocurrency-related risks, including current and potential future risks

Unexpected Market Reaction to Considering Bitcoin Custody

Despite BCBS categorizing Bitcoin as a high-risk asset, market reactions indicate that investors were not expecting the possibility of global banks opening up custody services for Bitcoin.

Following the publication of the consultation document, Bitcoin briefly surpassed $38,000 and settled around $37,060 at the time of writing.

BCBS believes that although the practical application of cryptocurrency is limited, banks must still adhere to risk policies, as further adoption could increase global financial stability risks.

The consultation document will remain open until September 10th this year, and all comments will be published on the Bank for International Settlements website.