Stablecoin Boom Forces Basel Committee to Rethink Punishing Bank Rules

The explosive rise of stablecoins has triggered pressure from U.S. banks and regulators on the Basel Committee to reconsider its stringent capital requirements for crypto assets.

Despite being marketed as lower-risk digital currencies, stablecoins remain subject to the same harsh regulatory treatment as volatile cryptocurrencies under current Basel rules.

Erik Thedéen, chair of the Basel Committee on Banking Supervision, acknowledged in a Financial Times interview that the global framework needs recalibration.

However, he noted that conflicting perspectives among international regulators make consensus challenging.

The existing regulations mandate that banks maintain substantial capital reserves against potential crypto losses.

Following resistance from the U.S. and U.K. to adopt these standards, the stablecoin surge has intensified demands for reform.

“What has happened has been fairly dramatic,” Thedéen remarked.

The Swedish central bank governor added that the stablecoin boom and their growing market presence necessitate a fresh regulatory perspective.

USDT and USDC Stablecoins Caught in Basel ‘Riskiest Asset’ Classification

The Basel Committee currently imposes a 1,250% risk weight on bank holdings of unbacked crypto assets, such as Bitcoin and Ethereum, classifying them as among the most hazardous assets under global banking standards.

These regulations, finalized three years ago, are scheduled to take effect on January 1.

Under this framework, banks must reserve $1.25 in capital for every $1 of crypto they hold, rendering direct crypto engagement financially unfeasible for most financial institutions.

Consequently, banks have avoided holding or providing loans against these assets, keeping crypto largely off institutional balance sheets.

This harsh approach, initially intended as a protective measure, is now being reassessed as stablecoin use expands and major economies pursue divergent regulatory paths.

Fed Rejects Basel Rules

Last year, the Basel Committee revised its standards to subject all crypto assets operating on permissionless blockchains to maximum capital restrictions.

This revision captures widely-used stablecoins such as Tether’s USDT and Circle’s USDC under the 1,250% risk weighting.

“The focus back then was very much on the bitcoins of this world,” Thedéen explained.

“No, of course, everyone is talking about stablecoins. Permissionless ledgers: Are they as risky as we thought? Or is there an argument we can look at this in a different way? We need to start analysing. But we need to be fairly quick on it.”

Financial institutions are mounting pressure on regulators to revise these standards.

In August, Wall Street groups contacted the Basel Committee, cautioning that current crypto regulations make bank participation in digital asset markets economically impractical.

Per the FT, the U.S. Federal Reserve, through Michelle Bowman, the Fed’s vice-chair for supervision, stated last month that the Basel risk weights won’t be implemented because they lack practical grounding.

The Bank of England has similarly opted against implementing the rules as currently structured, according to an informed source.

Japan has also joined the resistance.

Minoru Aosaki, who leads the international office at Japan’s Financial Services Agency, told Central Banking during a Tokyo interview that Japan will not adopt the Basel Committee’s crypto asset standards.

The EU has adopted portions of the framework but excluded sections addressing permissionless ledgers and related capital requirements.

2022 Basel Framework Set for Overhaul as Trump Backs Stablecoins

Bloomberg, however, has reported that the Basel Committee plans to revise its 2022 framework next year with more accommodating terms for banks entering crypto markets.

According to the report, numerous banks viewed the existing rules as actively discouraging involvement with cryptocurrency and stablecoin services.

Nevertheless, Thedéen cautioned that achieving regulatory consensus remains difficult due to fundamental disagreements about crypto risk levels and the appropriate role for bank-issued digital currencies.

“Going further than that at this point in time is difficult, because I’m the chair and there are so many different views in this committee,” he said.