The Basel Committee on Banking Supervision has recently published Basel III monitoring statistics for December 2023, revealing significant growth in US banks' exposure to cryptocurrencies.
According to the data, US banks allowed customer exposures worth $201.000 billion in 2023, reflecting an increasing adoption of cryptocurrencies in the traditional financial system.
This recent report exposes that, although the SEC’s SAB 121 accounting rule has been an obstacle to cryptocurrency custody at US banks, the scenario is changing. As we have reported here, SAB 121 makes it prohibitively expensive for banks to provide custody services, due to the excessive regulatory and capital requirements for the custody of cryptocurrencies and digital assets by banks and regulated financial firms in the United States.
However, this regulation is already being implemented. relaxing and the incoming Trump administration is likely to phase it out entirely. According to experts, this legislative change could open up new opportunities for US banks to offer broader cryptocurrency custody services.
Banks' exposure to cryptocurrencies is experiencing a substantial increase
Not only have US banks expanded their clients' exposure to cryptocurrencies, they have also increased their own exposures significantly.
According to the report, visa According to Ledger Insights, prudential exposures at the end of the 2023 financial year amounted to $559 million, representing a nearly fourfold increase compared to the previous year. Although this growth is coming from a small base, it is a clear indicator that banks are taking the potential of cryptocurrencies and digital assets seriously.
This increase in prudential exposures suggests that banks are assessing and managing the risks associated with cryptocurrencies in a more sophisticated manner. This could be a result of a greater understanding of cryptocurrency markets and the implementation of better risk management practices.
Europe and APAC, two developing sectors
As for Europe, the report highlights that the region has seen a 49% growth in assets under custody, reaching $5.800 billion in the second half of 2023. Likewise, the Asia-Pacific (APAC) region, despite being considered a promising growth market for crypto assets, was still lagging behind in terms of exposure to these digital assets at the end of 2023.
However, while banks’ own exposures in the region fell by 20%, the Basel Committee on Banking Supervision report highlighted that the regulatory landscape in APAC has undergone significant changes this year, which could translate into more interesting numbers in the organisation’s next report. To date, countries such as Japan and Singapore have adopted more favourable approaches towards cryptocurrencies, which could boost adoption in the region in the coming years.
The growing exposure of banks to cryptocurrencies
The expansion of crypto exposure by US banks has several important implications for the crypto industry and the financial system. First, this trend reflects a greater acceptance of cryptocurrencies in the traditional financial system, which could encourage their adoption by both institutional and retail investors.
On the other hand, the increase in prudential exposures indicates that banks are developing strategies to manage the risks associated with cryptocurrencies, which could drive innovation in cryptocurrency-related financial products and services and, among other things, foster more effective collaboration between banks and regulators, contributing to a more robust regulatory framework that benefits both the financial sector and consumers.
Finally, the report highlights that the Americas are leading the transformation of the financial landscape in terms of cryptocurrency services. This, together with a possible regulatory relaxation under the new Trump administration, could redefine the position of the United States in the crypto ecosystem, driving competition and innovation in the sector.
