Chris Perkins, president of investment firm CoinFund, has warned that the Basel Committee on Banking Supervision (BCBS)'s capital requirements for banks create a "chokepoint" that could stifle the growth of the cryptocurrency industry.

The BCBS, which sets global banking standards, has implemented capital rules that increase reserve requirements for banks holding crypto assets. According to Perkins, these rules reduce banks' return on equity (ROE), making crypto-related activities financially unviable and discouraging them from engaging in the crypto market. He argues that banks will prioritize investments in businesses with higher ROEs, effectively suppressing activity in the crypto sector.

The Basel Committee's regulations classify crypto assets into two groups, with Group 2 assets, which include unbacked crypto assets and stablecoins with ineffective stabilization mechanisms, subject to a newly prescribed conservative capital treatment. These assets attract a risk weight of 1250%, meaning banks must hold capital equal to the value of their crypto exposure. Furthermore, holdings of Group 2 assets are generally limited to below 1% of a bank's Tier 1 capital. If banks exceed this limit, the more conservative Group 2b capital treatment applies to the excess amount.

The rules have been updated to include more detailed requirements for stablecoins, including attestations and audits by third parties at least twice a year, and an external audit annually. The committee also considered banning the use of securities finance transactions, such as reverse repurchase agreements, in stablecoin reserves but ultimately allowed very short-term reverse repo agreements, provided they are over-collateralized by high-quality marketable securities.

The implementation date for these standards is set for January 1, 2026. While the standards set minimum requirements, individual BCBS members may implement stricter standards, potentially including outright prohibitions on banks dealing with certain crypto assets.

The BCBS's actions reflect concerns about the potential risks cryptocurrencies pose to the financial system. In April, the Bank for International Settlements (BIS), which hosts and supports the BCBS, released a report warning that cryptocurrencies could destabilize the financial system and widen the wealth gap, advocating for stricter government regulations. A follow-up report in June asserted that stablecoins fail as a form of money and could pose systemic risks.

Perkins has also voiced concerns about the BIS's proposals to impose know-your-customer (KYC) requirements and other traditional banking regulations on decentralized finance (DeFi) protocols and stablecoins. He argues that these measures contradict the fundamental principles of permissionless networks. He also highlights the systemic risk arising from the disparity between decentralized networks, which operate continuously, and traditional financial systems, which are closed during nights and weekends.

Despite these concerns, some argue that regulation could bring more institutional investment in cryptocurrency. Tighter regulations and increased clarity could lead to crypto being considered a legitimate asset class. The European Banking Authority (EBA)'s draft standards, designed to align with Basel and Markets in Crypto-Assets (MiCA) frameworks, provide a framework for the treatment of crypto-assets, setting out how banks and institutions must calculate and report their exposure to various types of digital assets. These rules specify capital treatment for various risk categories, including credit risk, market risk, and counterparty credit risk.

Ultimately, the impact of the Basel Committee's capital rules on the crypto industry remains to be seen. While the rules may create a "chokepoint" for growth, they may also provide clarity and encourage responsible innovation within the banking sector. Banks and other participants in the crypto asset markets are keenly anticipating the details of the implementation of the Standards at the BCBS member level.