June 3, 2023

BIS New Policy Allows Banks to Keep 2% of their Reserves in Cryptocurrency

The Bank of International Settlements, or BIS, is an international financial enterprise that is under the ownership of a host of Central Banks. The BIS is located in Switzerland, and it works to foster international monetary cooperation.

At the same time, it also operates as a Bank for 63 Central Banks that hold ownership stakes with participants like the US, UK, Germany, Italy, Belgium, and France, among others.

Recently, the BIS officials have issued a decree to allow its member banks to hold around 1% to 2% of cryptocurrency reserves in their holdings. The decree was issued by the oversight body of the Basel Committee.

To this end, a considerate standardization criterion was introduced by the Head of Supervision and the Group of Central Bank Governors.

Entry of Major Financial Corporations into the Crypto Market

The latest regulatory changes transfixed by BIS have classified possible crypto reserves into several categories. Some of these crypto types are mentioned as tokenized versions of stocks or bonds.

On the other hand, there is also room for stablecoins that are sans capped in supply. Lastly, there is also a defined space for bigwig cryptocurrencies like Bitcoin and Ethereum, etc.

As per the regulatory requirements, the banks are allowed to keep their crypto reserves over Tier 1 capital levels or 1% and below Tier 2 capital limitations or 2% of their capital allocations.

Considering this reform in mind, financial enterprises such as JP Morgan dons the largest Tier 1 capital valued at $263 billion. It means that it can hold around $2.6 billion in crypto reserves.

There are some exceptions to the rule of maximum Bitcoin or Crypto holdings sanctioned by the latest regulatory reforms issued by BIS. The banks holding stakes in BIS may treat all crypto reserves accumulated as a hedge exclusive of the 2% capital holdings limits.

In case a bank is invested in long Bitcoin futures and ends up acquiring spot Bitcoins as a hedge to balance the possibility of a price increase.

The hedge Bitcoin investment would fall out of the 2% tier requirements. On the other hand, there are some studies in lieu of modern investment theory that suggest that it is ideal to invest at least 1% of the total portfolio in Bitcoin.

The same studies have recommended increasing the Bitcoin reserves to 10% gradually. However, the Basel Committee of BIS is making do with 1% crypto holdings for now.

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