Proposed 1,250% Risk Weight Effectively Blocks Banks from Bitcoin
On March 12, Federal Reserve Governor Michelle Bowman signaled an upcoming proposal to implement Basel III international banking standards for U.S. banks, which includes a highly restrictive rule for cryptocurrency holdings. The framework assigns a 1,250% risk weight to Bitcoin, a classification that effectively requires banks to hold one dollar in capital for every dollar of Bitcoin on their balance sheets. This 100% capital requirement makes holding the asset prohibitively expensive for regulated institutions.
This treatment is significantly more punitive than for other asset classes. For comparison, highly speculative stocks carry a risk weight up to 400%, while stable government bonds are weighted near 0%. The rule effectively prevents banks from offering custody services, issuing loans collateralized by Bitcoin, or integrating the asset into their treasury operations. This has forced Bitcoin-related financial activity, a market currently valued at approximately $1.4 trillion, into unregulated or offshore entities, excluding traditional banks from participation.
Industry Prepares for 90-Day Pushback on 'Category Error'
Following the proposal's official release, a 90-day public comment period will commence, giving industry stakeholders a critical window to influence the final rule. Advocacy groups like the Bank Policy Institute and the Bitcoin Policy Institute are preparing to submit detailed recommendations, arguing that the 1,250% risk weight is a "category error." They contend that the classification ignores Bitcoin's 16-year operational track record and the significant institutional demand demonstrated by the successful launch of spot Bitcoin ETFs.
Regulators have indicated a willingness to review the capital framework. A successful push for reform could lead to a more nuanced risk assessment, potentially unlocking significant institutional capital. If the rules are revised, U.S. banks could begin to offer a wide range of services, including custody for clients and BTC-backed lending, which would mark a pivotal step in the asset's integration into mainstream finance.
We have developed proposals to modify each of the four pillars of our regulatory capital framework for the largest banks: stress testing, the supplementary leverage ratio, the Basel III framework for risk-based capital requirements, and the G-SIB surcharge.
— Michelle W. Bowman, Federal Reserve Vice Chair for Supervision.
