Pro-crypto U.S. senators including Cynthia Lummis have urged the U.S. banking regulators to update the capital treatment of digital assets in the country. A letter outlining the suggestion has been sent to the senior members of U.S.’ primary banking watchdogs — the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Comptroller of the Currency (OCC).
The letter essentially requests a “technology-neutral approach” that banks can legally take to manage on-balance sheet digital asset activities. For this, an update to the U.S. Crypto Capital Framework has been suggested by Senators Lummis, Dan Sullivan, Bill Hagerty, Bernie Moreno, Tedd Budd, and Jon Husted.
Diving into the Basel issue
Under the U.S. Crypto Capital Framework, American regulators including the Federal Reserve are working to chalk out the reserve capital requirements that traditional banks must hold against digital asset holdings.
The aim is to ensure that investors are protected now that the Trump government is netting traditional finance and digital assets together.
However, the volatile nature of cryptocurrencies — even the top ones like Bitcoin — has remained a crucial matter of concerns for global banks and governments alike. This has been among other reasons why banks around the world have refrained from engaging with digital assets for the longest.
Under traditional global standards set by the Basel Committee, banks face a major 1,250 percent risk penalty on crypto assets. To mitigate risks, these standards dictate banks to hold a full dollar in cash reserves for every single dollar they hold in crypto — making it too expensive for banks to enter the crypto space. Based in Switzerland, the Basel Committee is the primary standard-setter for prudential bank regulations internationally.
This is something that has been highlighted distinctly in the letter sent to the U.S. banking regulators.
“Digital assets such as bitcoin carry risks—volatility and operational complexity foremost among them. These risks are measurable, however, and the Basel Framework already contains sophisticated tools designed to address them,” the letter said. “A 1,250 percent risk weight bypasses those calibrated frameworks entirely, applying a blunt penalty originally designed for opaque, unrateable securitization tranches to a transparent, globally traded asset with deep derivatives markets, continuous liquidity, and cryptographic auditability.”
Here’s what the senators suggest
The letter requests that the capital requirements for banks must be determined by the underlying asset’s core risk characteristics.
This framework has been pitched as crucial for giving American banks the formal authority to participate in digital asset markets.
The U.S. is looking to keep its capital markets as the most innovative in the world — which aligns with why President Donald Trump has been so bullish on crypto regulations since his return to the White House last year.
As per reports, the Bank of England has also refused to implement the Basel standards.
The letter also quoted Michelle Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System (The Fed), who had said last year that, “We are not adopting those Basel risk weights… they are actually not very realistic.”
In November last year, the financial watchdog itself had acknowledged that the standard for banks’ crypto asset exposures could do with a review.
“We encourage you to begin work on a new capital framework for digital asset activities. Any proposed capital treatment of on-balance sheet digital asset activities should accurately reflect the opportunities and risks of digital assets and be based on, to the extent possible, a technology-neutral approach that gives banks the authority to participate meaningfully in digital asset markets,” the letter noted.
This request to the U.S. banking authorities come at a time when the CLARITY Act has come closer to being presented on the Senate floor for a full vote in the coming days. The legislation, once passed, will shape up the structure of the U.S. crypto market in terms of investor protection, bank participation, and other key factors.
Conner Brown, the Managing Director at Bitcoin Policy Institute, commented on the development saying, “This is a strong signal from Washington that legislators are looking closely at this issue as work on market structure continues. The letter has six signatories and three are on the Banking Committee.”
A response to the letter from the Federal Reserve, FDIC, and the OCC remains awaited for now.
