European Union lawmakers have taken a significant step towards reshaping the financial landscape by approving a new draft law that permits banks to allocate up to 2% of their capital to Bitcoin and other cryptocurrencies.
This move comes as part of a broader effort to establish clearer regulations for the cryptocurrency industry, mitigate potential risks, and ensure the financial system’s stability. In this post, we are going to have a closer look at this development and how it will impact the price of Bitcoin.
Draft Law Approved to Implement Basel III Capital Rules with Crypto Provisions
The European Parliament’s economic affairs committee recently gave the green light to a draft law aimed at implementing the final phase of post-financial global bank capital rules. This legislation introduces what is described as “prohibitive” requirements, specifically designed to address the potential risks of crypto assets. The main highlights of this development include:
Basel III Capital Rules Implementation
The draft law outlines the Basel III capital rules implementation, set to take effect in January 2025. To ensure a smooth transition, the committee has also endorsed temporary deviations, granting banks additional time to adjust to the new rules.
Capital Requirements for Crypto Assets
In a bold step, the committee introduced new elements to the draft law, one of which mandates that banks hold sufficient capital to cover their holdings of crypto assets fully. For every unit of cryptocurrency held, banks must maintain an equivalent amount of their capital. Markus Ferber, a prominent German committee member, clarified that this measure is aimed at curbing potential instability in the financial system due to the volatile nature of cryptocurrencies.
Alignment with Global Banking Regulators
The interim measure introduced by the European Parliament is consistent with the recommendations put forth by global banking regulators. As countries around the world, including the United States and the United Kingdom, take steps towards regulating cryptocurrencies, the European Union’s approach aligns with the larger international effort to establish a secure and sustainable framework for the burgeoning crypto industry.
Push for Clearer Regulations
The European Union’s push for robust regulations within the cryptocurrency space is not a new development. Despite the delay in the final vote on the Markets in Crypto-Assets Regulation (MiCA) due to technical issues, the recent approval of the banking regulations underscores the EU’s commitment to fostering a well-defined regulatory environment for cryptocurrencies.
Implementation Process and Implications
While the draft law has gained the approval of the European Parliament’s economic affairs committee, it is essential to note that this is just the initial step in the process. The directive still needs to pass through the entire European Parliament and receive the endorsement of national finance ministers in the Council of the European Union to become legally effective.
Prudent Allocation Strategy
The directive’s endorsement of a maximum 2% allocation of capital to Bitcoin displays a balanced approach to risk management. By setting a specific cap on crypto-related investments, banks are encouraged to engage with the burgeoning market while maintaining a prudent level of exposure. Based on the long-term Bitcoin outlook, this measured approach minimizes the potential for undue systemic risk arising from excessive crypto holdings.
Emphasis on Limit and Capital Coverage
Despite concerns that the new regulations might appear restrictive at first glance, it is important to highlight that both the Bank of International Settlement (BIS) and the European Union are not seeking to impose an outright ban on cryptocurrencies for European banks. Rather, they are focused on introducing a reasonable limit and ensuring sufficient capital coverage to manage potential risks associated with crypto assets.
Recognition of Riskiest Investments
The draft law’s stipulation that volatile cryptocurrencies like Bitcoin will be categorized as the riskiest investments reflects a keen awareness of the market’s inherent volatility. By acknowledging this risk factor, the European Union is taking a proactive approach to safeguarding the stability of the financial ecosystem from potential disruptions caused by extreme price fluctuations in the cryptocurrency market.
The impact of the European Union’s decision to allow banks to hold a maximum of 2% of their capital in Bitcoin. Indeed, long-term cryptocurrency prediction requires market analysis as several factors could influence it.
Also read: What Countries Agreed to Regulate Stablecoins?
Conclusion
The announcement of such regulatory decisions can trigger short-term price fluctuations as investors react to the news. Positive sentiment may lead to price increases, while negative sentiment could result in temporary declines. Now BTC price is hovering around $26K, which is supported by the daily chart.
RSI is around 40, with Bollinger Bands showing less volatility. All these indicators suggest a downtrend or consolidation. However, the EU’s regulatory stance could be seen as a step towards greater institutional adoption and legitimacy of cryptocurrencies. This could attract more institutional investors to BTC, potentially driving up demand and prices over the long term.
