Several Republican senators have written to federal banking regulators, urging a review of the capital rules applicable to banks holding crypto assets such as Bitcoin. They argue that the current 1250% risk weight is too high and effectively restricts banks' allocation of such assets.

1250% risk weighting becomes the focus

The letter was sent to the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). Signatories included Republican senators Cynthia Lummis, Bill Hagerty, and Dan Sullivan.

In the letter, lawmakers stated that the current rules treat Bitcoin with the most stringent approach within the capital framework, which is inconsistent with the idea of developing regulatory requirements based on the principle of technological neutrality.

According to the Basel Committee on Banking Supervision's 2022 prudential capital standards for digital assets, banks holding certain crypto assets such as Bitcoin on their balance sheets are required to apply a risk weight of 1250%.

This means that for every $1 of related assets a bank holds, it must set aside $1.25 of capital as a buffer. In contrast, cash and U.S. Treasury bonds have a risk weight of 0%, while mortgage loans typically have a risk weight of around 50%.

Lawmakers demand adjustment of the scope of application

Senators are asking regulators to consider extending similar guidance to the treatment of tokenized equity capital to other digital assets, rather than continuing to treat them one-size-fits-all by asset class.

They believe that if the current standards are maintained, even if banks are within the compliance framework, it will be difficult for them to effectively hold or provide related services, which will reduce the space for crypto assets to enter the traditional financial system.

Institutional configuration thresholds may be affected

Jeff Walton, Chief Risk Officer at Strive, stated that Basel risk weighting has been a significant obstacle to Bitcoin's inclusion on broader institutional balance sheets. If this aspect is adjusted, the threshold for rating agencies and institutional capital to hold Bitcoin could decrease significantly.

In recent years, Bitcoin has made some progress in the US regulatory arena, including the approval of spot ETFs and the expansion of related trading and service coverage by large financial institutions such as JPMorgan Chase and Morgan Stanley.

The report mentions that if capital rules are further adjusted, coupled with supporting changes such as tax treatment, the adoption of crypto assets in the banking system and broader financial markets may continue to expand.