The cryptocurrency market has seen relatively low investor interest this year, and many cryptocurrency companies have had to either go out of business or file for bankruptcy. The collapse of cryptocurrency exchange giant FTX signaled a downtrend for a number of cryptocurrencies, and the US Federal Reserve’s (Fed) latest rate hike announcement came as the final nail in the coffin. However, news from the Bank for International Settlements may breathe life into the crypto money market in the long run.
The Bank for International Settlements (BIS) has recently released its “Precautious Approach to Cryptocurrency Exposure” report. In the official statement, it was stated that banks will be allowed to keep 2% of their reserves in cryptocurrencies.
The Bank for International Settlements has drafted new policy that allows banks to hold 2 percent of their reserves in cryptocurrencies, after the second consultation over the summer on precautionary regulation of banks’ exposure to cryptocurrencies. The policy, which covers various aspects of how to define and handle cryptocurrencies, will take effect on January 1, 2025.
In early June, the Bank for International Settlements introduced holding cryptocurrencies in reserves, which limits banks from holding more than 1% of their reserves in cryptocurrencies. The official announcement divides cryptocurrencies into two groups, Group 1 and Group 2. Tokenized traditional assets and cryptocurrencies with effective stabilization mechanisms are both included in the first category, while cryptocurrencies that do not “meet any of the classification conditions” are classified as Group 2 assets.
The report published by the Bank for International Settlements states that a bank’s exposure to Group 2 cryptocurrencies should not exceed 2 percent of the bank’s Tier 1 capital within its reserves. In the reserves section of the report, this criterion is particularly highlighted. With this new development, financial institutions will now be able to hold different cryptocurrencies in their reserves and in turn increase their reserves. The report also included details about the risks and control of the cryptocurrencies in question, and also included the following statements:
The required process has been changed to remove the supervisory pre-approval element; instead, in the final standard, banks are required to notify supervisors of their classification decisions, and supervisors will have the power to override those decisions if they disagree with a bank’s assessment.