Basel Rules on Bitcoin Are Forcing Banks to the Sidelines Amid Surging Institutional Interest
Basel Rules on Bitcoin are increasingly becoming a central topic in institutional finance as traditional banks face growing pressure to participate in the digital asset space. Yet, despite rising interest from both investors and financial institutions, restrictive capital requirements imposed by the Basel Committee are stifling progress.
A recent The Banker study claims that big banks are unable to adequately satisfy institutional demand for Bitcoin mostly because of the Basel framework classifying unhedged crypto holdings—including Bitcoin—with a 1,250% risk weight. This classification treats the asset as if it has the maximum degree of speculative risk, hence making storing Bitcoin on bank balance sheets economically impossible.
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The CEO of GFO-X, a UK-based digital asset derivatives exchange, Arnab Sen underlined the need of changing these policies right away. Speaking at the Digital Assets Summit in London, Arnab Sen, CEO of GFO-X, a UK-based digital asset derivatives exchange, said, “The market is crying out for banks to intermediate Bitcoin trading and collateral services, but the existing rules make it almost impossible.”
Many organisations being driven to the edge of cryptocurrency marketplaces share this feeling. Trading volumes are moving towards non-bank intermediaries and unregulated platforms as banks battle Basel-imposed restrictions, hence increasing worries about systematic risk and market control.
Sen stressed again, “The Basel Rules on Bitcoin are practically freezing banks out of this area.” “Regulatory inflexibility is stifling creativity and market expansion even though there is great consumer demand.”
Change is indicated on the horizon. Sen observed that talks with world authorities on rethinking Bitcoin’s treatment under the Basel framework are ongoing. He stated, “I think the Basel approach will be examined this year.” Institutional demand is rising fast, hence there is continuous lobbying.
This regulatory review’s effects might be far-reaching. A more favourable capital treatment for Bitcoin would allow banks to offer trading, custody, and even crypto-backed lending services, hence opening the door to wider institutional adoption.
Roger Bayston, head of digital assets at Franklin Templeton, stated that many companies are particularly interested in crypto-backed lending, which present capital treatment policies now restrict.
Recent events also point to a changing tide. Many are hailing the elimination of SAB 121 in the United States as a turning point since it once imposed onerous accounting standards on crypto custodians. Sen called the repeal “the first step” in allowing banks to reenter the digital asset domain.
Marcus Robinson of the London Stock Exchange Group shared this hope. Leading CDSClear and DigitalAssetClear, he noted that businesses are shown “growing interest and comfort” in cryptocurrency investments.
A joint poll by EY-Parthenon and Coinbase supports this view. Of institutional investors, 86% either now own digital assets or intend to by 2025.
Moreover, organisations are seeing the long-term worth of cryptocurrency in varied portfolios. Gadi Chait, investment manager at Xapo Bank, said that although volatility has traditionally been a hurdle, more knowledge and regulatory certainty are enabling investors to grasp the use and different risk profiles of digital assets.
Ultimately, the Basel Rules on Bitcoin might soon come under long-overdue examination. The need to reconsider how Bitcoin is handled on balance sheets becoming more urgent as institutional momentum grows. Should world authorities react with more fair policies, the financial sector might be ready for a fresh wave of cryptocurrency acceptance.
