Financial institutions are facing significant challenges in responding to the increasing institutional interest in Bitcoin. Strict capital requirements are making it difficult for banks to hold the cryptocurrency on their balance sheets in a financially viable manner.
As the appetite for digital assets continues to grow, current regulations set by the Basel Committee are impeding banks from engaging in a marketplace they desire to join, according to a report from The Banker.
Arnab Sen, CEO of GFO-X—a digital asset derivatives exchange based in the UK—warned that these regulatory limitations are hindering the participation of traditional financial institutions in the cryptocurrency markets.
During his remarks at the Financial Times’ Digital Assets Summit in London, Sen articulated, “The market is crying out for banks to intermediate Bitcoin trading and collateral services, but the existing rules make it almost impossible.”
Basel Rules Treat Bitcoin as High-Risk Asset
The core of the dilemma lies within the Basel framework, which classifies unhedged cryptocurrency holdings—including Bitcoin—with a staggering 1,250% risk weight, labeling them as highly speculative assets.
This classification necessitates that banks maintain a considerably higher amount of capital to support such exposures, thereby diminishing the incentive for banks to engage with this asset class.
“These rules are freezing banks out of the space,” Sen stated in an interview with The Banker. “There’s strong demand from institutional clients, but it’s just not viable for banks under current regulations.”
This regulatory impasse is driving trading activity towards unregulated platforms or non-bank intermediaries, raising alarms about market oversight and potential systemic risks.
$1.6 TRILLION BANK OF AMERICA’S CEO SAYS US BANKING INDUSTRY WILL SOON EMBRACE CRYPTO FOR PAYMENTS
IT’S HAPPENING pic.twitter.com/PrNDFI6k9x
— Vivek (@Vivek4real_) January 26, 2025
Sen indicated that discussions among global regulators are already in progress to reassess the treatment of Bitcoin within the Basel regulatory framework. He expressed optimism regarding potential changes that could be forthcoming.
“I believe the Basel approach will be reviewed this year,” he mentioned during a panel focused on institutional cryptocurrency adoption. “There’s lobbying underway because institutional demand is growing rapidly.”
Echoing these sentiments, Marcus Robinson, head of CDSClear and DigitalAssetClear at the London Stock Exchange Group, noted that institutions are increasingly showing “interest and comfort” with cryptocurrency.
Institutions Eyeing Crypto-Backed Lending
Roger Bayston, head of digital assets at Franklin Templeton, highlighted that firms are particularly exploring the opportunities to lend against crypto assets.
Sen also pointed to the recent repeal of SAB 121 in the U.S., which had imposed accounting burdens on crypto custodians, as a pivotal event that could facilitate banks in providing custody services.
He characterized the repeal as “the first step” toward enhancing institutional participation in the crypto space.
“The next intellectual step,” Sen elaborated, “is to rethink how Bitcoin is treated on bank balance sheets.”
A recent survey conducted by Coinbase and EY-Parthenon revealed that 86% of institutional investors either have exposure to digital assets or plan to allocate funds to cryptocurrencies in 2025.
Furthermore, as the global regulatory environment evolves, institutions are increasingly recognizing cryptocurrencies as a legitimate part of a diversified investment strategy.
Gadi Chait, Investment Manager at Xapo Bank, remarked in a recent interview that historical deterrents for institutional investors, particularly concerning cryptocurrency volatility, are being alleviated through greater awareness and research regarding varying risk levels and asset utility.
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