Changing Basel rules could unlock 'huge' liquidity for BTC: Analyst

Banks seek to deploy capital in the most efficient way possible, but capital rules under the Basel III framework make crypto holdings costly.

The Basel III rules, which govern bank capital requirements, are set to be updated in 2026, and if Bitcoin (BTC) receives a lower risk rating in the revised rules, it could potentially trigger a “huge” influx of liquidity into BTC, according to market analyst Nic Puckrin.

Under the current Basel rules, BTC and similar digital assets are given a 1,250% risk weight, meaning banks must hold reserve assets at a 1:1 ratio to back any Bitcoin held on their balance sheets, Puckrin said.

These restrictive capital requirements make it “almost impossible” for banks to hold BTC or offer BTC-related services, he added. He said:

In February, several crypto treasury company executives called for reform of the Basel rules to implement more accommodating risk weights for digital assets that would allow banks to participate in the blockchain economy.

Related: Bitcoin advocate group to fight Basel’s ‘toxic’ treatment of cryptocurrency

The Basel Committee on Banking Supervision (BCBS) proposed the current capital requirements for cryptocurrencies in 2021, which placed crypto in the highest risk category.

While BTC and crypto carry a 1,250% risk weight under the current rules, investment-grade corporate bonds carry a risk weight of up to 75%, according to Jeff Walton, chief risk officer at Bitcoin treasury company Strive.

Gold, government bonds and physical cash have a 0% risk weight, Walton said, adding that “risk is mispriced.” 

The Basel capital requirements are a covert form of choking off the crypto industry, and are more subtle than efforts to debank crypto companies under Operation Chokepoint 2.0, Chris Perkins, president of investment company CoinFund, told Cointelegraph.

“It’s a very nuanced way of suppressing activity by making it so expensive for the bank to do those activities,” Perkins said.

Magazine: Danger signs for Bitcoin as retail abandons it to institutions: Sky Wee

Source: CoinTelegraph