CRR III – Prudential treatment of crypto exposures

Background – CRR III introduces a new transitional framework for the prudential treatment of exposures in crypto-assets. The new framework is applicable to credit institutions as of 9 July 2024 and includes own funds requirements for exposures in crypto-assets. On 8 January 2025, EBA published a consultation for draft regulatory technical standards, further specifying those requirements. The proposed Draft RTS are meant to provide a comprehensive framework for exposures to both direct holdings of crypto-assets and derivatives as well as ETF/ETN that reference such crypto-assets.

Introduction

Crypto-assets (including tokenized traditional assets) and the use of distributed ledger technology ("DLT") for financial transactions enjoy an increasing attention of market participants. As one of the largest single markets, the EU took unprecedented effort to create a comprehensive, harmonized regulatory framework that applies to offerings and services that relate to crypto-assets across the EU Member States. As of January 2025, offering of crypto-assets and crypto-asset services can be provided in all Member States based on the Regulation (EU) 2023/1114 ("MiCAR"). This will allow firms that so far have been operating within national borders to access investors and clients in all EU Member States based on the so-called EU passport. It is important to note that MiCAR introduced prudential requirements for issuers of certain crypto-assets, such as stablecoins, including minimum own funds requirements and requirements around the maintenance of the reserve of underlying assets.

In the course of 2025 and 2026, the EU will shift its focus to the increasing migration of crypto-asset offerings and services into the financial system that comprises credit institutions, Directive 2014/65/EU ("MiFID") investment firms, payment institutions and asset managers. The merger of the crypto space with traditional finance is still faced with reservations and lack of experience with new technology within the supervisory community. In light of significant volatility in crypto markets, the regulators want to carefully assess the risk profile of crypto-assets and their implications for financial stability prior to allowing traditional players to enter this territory. At the same time, in light of global competition, the EU has positioned itself at the forefront of global developments in regulation of the crypto space and is determined to ensure that the EU single market emerges as one of the most attractive and reliable crypto-asset markets in the world.¹

Currently, the EU is working on a regulatory regime that is meant to ensure that credit institutions engaging in crypto activities can sustain and withhold volatility shocks, when carrying out business activities in crypto-assets. As of July 2024, CRR credit institutions are subject to a transitional regime that applies to credit institutions' crypto-asset exposures and will eventually be replaced by a dedicated EU Commission's legislative proposal for the prudential treatment of crypto-asset exposures ("Future EU Legislative Proposal"). The deadline for such Future EU Legislative Proposal is 30 June 2025. The Future EU Legislative Proposal will introduce a holistic and comprehensive framework for the prudential treatment of crypto-assets, including own funds requirements that will be based on a risk sensitive classification model, an aggregate limit for crypto exposures, a crypto-asset related leverage ratio, liquidity requirements tailored to crypto-assets and disclosure and reporting requirements. The discussion about the details of the Future EU Legislative Proposal will leverage on the international standards for the prudential treatment of crypto-asset exposures published by the Basel Committee on Banking Supervision ("BCBS") ("BCBS Standards"). Such BCBS Standards have emerged after three public consultations in 2021, 2022 and 2023, and years of discussions between the BCBS, key central banks and major market participants.² The BCBS Standards have been first published in December 2022 and amended since then in July 2024.³ They are based on a prudential analysis of risks associated with different types of crypto-assets and the implications of banks' business activities in the crypto space.

Until the date of application of the comprehensive EU legislative act, which is expected in the course of 2026, a transitional treatment for calculation of own funds requirements for crypto-asset exposures applies under Article 501d(2) of Regulation (EU) 2024/1623 ("CRR III") ("Transitional Regime").⁴ The European Banking Authority ("EBA") has been given the mandate to develop draft regulatory technical standards ("Draft RTS") and further specify the own funds requirements under the transitional regime. On 8 January 2025, the EBA has published a Consultation Paper for Draft RTS that, to a large extent, is consistent with the BCBS Standards. However, there are some notable departures from the BCBS Standards and gold plating issues which could potentially negatively affect bank's ability to engage in crypto-related activities and, as the consequence, the competitiveness of the EU single market in crypto-assets.

This Client Alert provides an overview over the proposed Draft RTS that specify the Transitional Regime and encourages clients to closely follow EBA's consultation process.

Scope of application

The transitional rules under Article 501d(2) CRR III apply to exposures to all types of crypto-assets (including tokenized traditional assets). In this respect, Article 5a CRR III introduces definitions specific to crypto-assets. The crypto-asset exposure is broadly defined as an asset or off-balance sheet item related to a crypto-asset that gives rise to credit risk, counterparty credit risk, market risk, operational risk, or liquidity risk (Article 5a no. 5 CRR III). Consequently, the transitional regime applies to exposures to all types of crypto-assets within the meaning of Article 3(1) no. 5 MiCAR, notably crypto-assets under the scope of application of Article 2 MiCAR (i.e., direct positions in crypto-currencies, utility tokens and asset-referenced tokens) as well as tokenized traditional assets (i.e., instruments referencing 'traditional assets' including financial instruments within the meaning of Article 4(1) no. 15 MiFID).

More specifically, the transitional regime under Article 501d(2) CRR III and the Draft RTS differentiate between the following categories:

Crypto-asset exposures to tokenized traditional assets (Article 501d(2) point (a) CRR III)

Tokenized traditional assets are digital representation of "traditional assets", such as financial instruments (bonds, equities), electronic money (e-money tokens) or real estate, transferred and stored electronically using DLT (including blockchain) or similar technology. This process is meant to enhance liquidity, transparency, and accessibility of the asset in financial and payment markets. In the EU and Member States, tokenized assets are gaining traction as financial institutions and investors increasingly start to recognize their potential.⁵ Common use cases include tokenized bonds, which allow for fractional ownership, digital representation of money (either through e-money tokens or tokenized deposits) and real estate tokens, which enable investors to buy and sell (partial) ownership in properties. Examples in the EU include the issuances of tokenized bonds by the European Investment Bank ("EIB") and real estate tokenisation projects in Germany and France.

As per the definition in Article 5a no. 5 CRR III, tokenized traditional assets are a type of crypto-asset that represents a traditional asset, including an e-money token. "Traditional asset" in this sense means any asset other than a crypto-asset, including financial instruments, such as transferable securities (e.g. bonds), funds and pension products (Article 5a no. 4 CRR III). Notably, it also covers (i) any financial instrument which is issued on any type of DLT (e.g. public or private blockchains) and regardless whether the registration on the DLT is 'native' or 'non-native' and (ii) digital representations of deposits (the so-called "tokenized deposit")⁶ on DLT.

It is important to note that the scope of exposures to tokenized traditional assets thus also covers e-money tokens ("EMT"), i.e. crypto-assets that purport to maintain a stable value by referencing the value of one official currency (Article 5a no. 2 CRR III in connection with Article 3(1) no. 7 MiCAR).

Article 501d(2) point (a) CRR III provides that tokenized traditional assets are treated as exposures to the traditional assets they represent. Such exposures are subject to existing own funds requirements under the CRR II and have not been included in the Draft RTS. An exemption exists for tokenized traditional assets whose values depend on any other crypto-assets (Article 501d(2) subpara. 2 CRR III), which shall be treated similar to those exposures outlined in Article 501d(2) point (c) CRR III (which are discussed further below).

As a consequence, exposures to "stablecoins" referencing one single official currency will be subject to the same treatment as exposures to other traditional assets.⁷ While, in contrast to deposits (including tokenized deposits), such tokens are prohibited from paying interest (Articles 40 and 50 MiCAR), they perform an important function in the crypto ecosystem as a bridge to the traditional financial system and are therefore widely used. Notably, neither Article 501d CRR III, nor the Draft RTS specify any requirements on the consideration of redemption risks for these types of crypto-assets, which marks a departure from the BCBS Standards.

Exposures to asset-referenced tokens that reference traditional assets (Article 501d(2) point (b) CRR III)

A second category concerns asset-referenced tokens ("ART") with traditional assets as underlying. Examples for such ART include crypto-assets referencing the value of commodities.⁸ ART's attractiveness lies in providing a relatively stable instrument in the crypto space, while enjoying (to some extent) less stringent regulation compared to EMT.

The difference between (i) tokenized traditional assets (see above) and (ii) asset-referenced tokens that reference traditional assets is as follows:

• ART are a type of crypto-asset that purports to maintain a stable value by referencing another value or right or a combination thereof (Article 3(1) no. 6 MiCAR). The ART can reference the value of a basket comprising official currencies. However, in contrast to the EMT, they cannot reference the value of just one official currency.
• While the ART could reference the value of one or multiple assets, they do not allow for the title transfer of the underlying assets (i.e., the holder gains only exposure to the performance of the underlying asset). In contrast, tokenized traditional assets usually represent the title of the underlying asset (i.e., constitute a digital representation of the ownership on the traditional asset, which usually allows the title transfer by way of the token transfer on DLT).

It is important to note that Point (b) includes only ART issued by MiCAR compliant issuers (i.e. issuers which are licensed and supervised under MiCAR). ART offered by issuers and/or intermediaries which are not regulated under MiCAR (e.g. due to the fact that they are based in third-countries and do not target specifically the EU market), are subject to the prudential treatment under Point (c) (see below).

As the EBA seeks to align the rules for crypto-asset exposures with the categorization framework for crypto-assets under MiCAR, the Draft RTS partly depart from the categorization approach taken in the BCBS Standards. This becomes particularly visible in the prudential treatment of some stablecoins which, depending on their legal qualification and the compliance of their issuer, enjoy different treatment.

Other crypto-asset exposures (Article 501d(2) point (c) CRR III)

The final category of crypto-asset exposures is a "catch-all" category. This category includes exposures to any crypto-assets which do not fall in the above categories as well as financial instruments referencing such "other crypto-assets" (i.e., derivatives, ETN, ETF).

The scope of this category covers various types of crypto-assets (e.g. utility tokens, crypto-currencies), irrespective of whether the issuer of such assets and/or the offering complies with requirements under the MiCAR.

By far the most crypto-assets and indirect exposures thereto will fall into this category. Well-known uses cases within this category include direct and indirect (e.g. via ETP) holdings of, for example, Bitcoin and Ether, as well as any other utility tokens or so-called "meme coins".

Overview – own funds requirements under Article 501d CRR III and Draft RTS

Below, we provide a high-level overview over the requirements proposed by the EBA in the Draft RTS which breaks down the essential treatment of each category of crypto-asset exposure under the relevant risk categories.

Valuation of crypto-assets and off-balance sheet exposures

As of today, trading book exposures to financial instruments with crypto-assets as underlying are subject to the prudent valuation requirements under Article 105 CRR. Article 1 of the Draft RTS provides that the same prudent valuation rules under Article 105 CRR shall apply to crypto-assets under MiCAR, if such crypto-assets are valued at fair value under the applicable accounting framework.

Prudential treatment of exposures to Point (a) crypto-assets

Article 501d(2) point (a) CRR III aligns the treatment of crypto exposures to tokenized traditional assets with the treatment of exposures to the underlying traditional assets. The fact that such assets are ultimately represented on a blockchain does not fundamentally change their risk profile. By way of example, a tokenized bond will be subject to the same own funds requirement as those that apply to exposures connected to trading book and/or non-trading book positions in its traditional counterpart. Consequently, the Draft RTS do not introduce any specific prudential treatment of such assets.

An exception applies to crypto-asset exposures to tokenized traditional assets whose value depends on any other crypto-assets (Article 501d (2) subpara. 2 CRR III). An example for such case would be a tokenized ETP referencing the value of Bitcoin or a basket of multiple crypto-assets. Without Article 501d(2) subpara. 2 CRR III, these would not be subject to the stringent treatment prescribed for "other crypto-asset exposures", while entailing similar risk characteristics. In such cases, indeed, crypto-specific own funds requirements under the Draft RTS would apply (see explanation of rules for other crypto-asset exposures below).

Finally, crypto-assets qualifying as EMT pursuant to Article 3(1) no. 7 MiCAR will be subject to the same treatment as traditional assets (i.e., one currency asset exposures) (see Article 5a no. 5 CRR III).

Prudential treatment of exposures to Point (b) crypto-assets

Introduction

Own funds requirements for exposures to ART which (i) reference traditional assets and (ii) are compliant with requirements under the MiCAR (including the authorization requirements for the issuer/offeror of such crypto-assets), are specified in Article 2 of the Draft RTS. Given the nexus to traditional assets, the proposed framework is based on the correct assumption that, to a large extent, the risk profile of such assets resonates with the risk profile of the traditional assets serving as referenced underlying for the ART. As a consequence, Article 2 Draft RTS provides that credit institutions shall apply the requirements set out for traditional assets under the CRR (i.e., own funds requirements for credit risk ("CR"), counterparty credit risk ("CCR"), market risk ("MR"), and credit valuation adjustment ("CVA") risk).

Own funds requirements for credit risk

ART that reference traditional assets are subject to a less strict prudential treatment in comparison to the treatment of other crypto-assets such as crypto-currencies and utility tokens: while the ART referencing traditional assets are subject to a general risk weight of 250% (Article 2(1) Draft RTS), the own funds requirements for exposures to other crypto-assets will have to be computed based on a 1,250% risk weight (Article 3 Draft RTS). In practical terms, the application of the 1,250% means that credit institutions will have to hold own funds at least equal in value to the amount of the respective crypto-asset exposure.

Article 2(1) Draft RTS provides that credit institutions have to compute own funds requirements for credit risk in line with the overall own funds requirements for credit risk in Part Three, Title II CRR. In contrast to the prudential treatment of other crypto-assets under Article 3 Draft RTS, this leaves room for computation of the credit risk of referenced traditional assets based on the Internal Ratings Based Approach.

Article 2(2) Draft RTS requires credit institutions to apply a general risk weight of 250% for credit risk to all ART referencing traditional assets and does not take into consideration the specific exposure classes the respective underlying traditional asset can be assigned to. This is in line with the wording of Article 501d(2) point (c) CRR III that requires the assignment of the 250% risk weight without further specifying the details of such approach. This marks a significant deviation from the BCBS Standards in relation to stablecoins, which require credit institutions to apply a look-through approach and determine the RWA applicable to a direct holding in the referenced (pool of) assets (see 60.32 and 60.33 of the BCBS Standards). If the EBA followed such approach, credit institutions would be able to apply the risk weight that would apply under the CRR to a direct holding of the underlying traditional asset. It is not clear why a different prudential approach has been applied to ART whose risk profile mirrors the risk profile of the underlying traditional asset.

In conclusion, EBA proposes to apply the high 250% risk weight whilst fully ignoring (i) the approach proposed in 60.32 and 60.33 of the BCBS Standards as well as (ii) the fact that the issuer of the respective ART will be subject to own funds requirements (Article 35 MiCAR) and the requirement to maintain a reserve of underlying assets (Articles 36 – 38 MiCAR). Not least in comparison to the relatively light treatment of EMT, the risk weight of 250% seems particularly high. Such gold plating gives rise to the impression that the EU applies a "crypto-buffer" to MiCAR-regulated issuers and treats such regulated entities as riskier than other regulated entities. This will inevitably have an impact on credit ratings of the EU based issuers of ART.

One particular risk that can arise in addition to the credit risk of the underlying traditional asset is the risk of default of the redeemer (i.e., the issuer of the ART that has to maintain the reserve of underlying traditional assets and, where applicable, perform the redemption function in respect of such traditional asset).

In this respect, the Draft RTS propose the application of the minimum risk-based own funds requirements to cases where the issuer takes recovery measures in line with the recovery plan, such as the limitation of the amount of redeemable tokens per day or the suspension of redemption. The risk of default of the issuer is considered to have materialised, if the issuer of the ART can no longer meet the redemption obligation towards the ART holder pursuant to Article 39 MiCAR. In respect of the treatment of such situations, EBA has raised the question of whether a specific treatment of the risk of an issuer's default should indeed be included in the final Draft RTS, or whether the general risk weight of 250% would sufficiently account for such risk of default. A tailor-made approach that is consistent with the existing own funds requirements under the CRR would be advisable.

Finally, credit institutions will not be able to accept ART referencing traditional assets as an eligible form of collateral for credit risk mitigation purposes as set out in Article 108 CRR (Article 2(2) Draft RTS). This ban is in line with the corresponding rule for other crypto-assets as addressed below.

Counterparty credit risk

Certain transactions referencing ART which in turn reference traditional assets (e.g., derivatives with such ART as underlying) give rise to counterparty credit risk. Article 2(3) Draft RTS provides for computation of the CCR in line with the general CRR rules for traditional assets, whereas a volatility adjustment of 30% is proposed to be factored in for institutions that lend these crypto-assets in the context of securities financing transactions ("SFT").

With regard to netting sets, the Draft RTS propose two options: credit institutions could either: (i) apply the general 250% risk weight to direct credit risk exposure computed for netting sets, or (ii) calculate own funds requirements for the respective counterparty and factor in the respective counterparty's risk weight in line with the CRR. In this respect, the application of 250% risk weight instead of the actual risk weight of the respective counterparty does not seem to be disproportionate.

Market risk

For calculating own funds requirements for market risk, Article 2(4) Draft RTS mandates the application of the existing framework on market risk for traditional assets in Part Three, Title IV CRR, however with certain modifications. The details of these modifications depend on the approach chosen by the institution to calculate own funds requirements for market risk.

Standardized approach: For institutions using the standardized approach, largely the same requirements as those set out under the CRR shall be applied, with the following exceptions:

• All types of positions that are affected by price changes in crypto-assets must be included;
• Each crypto-asset shall be expressed in terms of quantity and converted spot price;
• The crypto-asset exposures shall follow the treatment for options for the respective (traditional) asset that is referenced; and
• Netting and hedging shall be recognised between the crypto-asset and the traditional asset it references.

Alternative standardized approach: The alternative standardized approach follows the requirements set out in the CRR, with a modified assignment of risk classes for the calculation of own funds requirements for delta, vega and curvature risk. Thereby the risk factor of each crypto-asset as well as the sensitivities to these risk factors shall be aligned to those of the traditional asset referenced by the ART. Similar alignment to the treatment of the referenced traditional asset is foreseen for the calculation of own funds requirements for default risk and the jump-to-default amount.

Alternative internal model approach: The requirements from the CRR also apply when using the alternative internal model approach, including a similar alignment of risk factors from traditional asset to the crypto-asset based on the respective traditional asset that is referenced, as in the alternative standardized approach. Further, the Draft RTS provide for their treatment as distinct instruments from traditional assets, along with certain specifications. The alternative internal model approach will become applicable, once the CRR III market risk rules enter into force in the EU on 1 January 2026.

Internal model approach: The internal model approach in Part Three, Chapter 5 CRR, on the other hand, is ruled out entirely from the calculation of own funds requirements for market risk for crypto-assets under the transitional regime, Article 2(4) (d) Draft RTS. According to the explanatory note, this is based on the limited relevance the EBA sees for this approach, given the limited time of application of the transitional regime prior to the full application of the FRTB framework.

Credit valuation adjustment risk

With regard to own funds requirements for CVA risk, the Draft RTS once again make reference to underlying traditional assets. According to Article 2(5) Draft RTS, derivatives and securities financing transactions on ART are thus to be treated as the referenced traditional assets under the provisions in Part Three, Title VI CRR.

Prudential treatment of exposures to Point (c) crypto-assets

Introduction

Currently, most crypto-assets do not reference traditional assets and therefore will not be subject to prudential treatment under Point (a) and Point (b). Consequently, the exposures to such crypto-assets will be subject to Article 3 Draft RTS (and not Article 2 Draft RTS). Within this group of crypto-assets, there are few established and popular crypto-assets which enjoy the status as benchmarks and reference for exchange-traded financial products and/or derivatives. There are other crypto-assets which are now transitioning towards such "status" and a variety of emerging crypto-assets which do not constitute a benchmark or reference for exchange traded products (and as consequence have a low liquidity and high-volatility profile). Article 3(1) Draft RTS factors this in and differentiates between two cases:

• Crypto-assets enjoying the status as benchmark and reference for exchange-traded financial products and/or derivatives (see criteria in Article 3(1) Draft RTS) shall be subject to a risk-sensitive approach that seeks to compute credit risk, counterparty credit risk, market risk, credit valuation adjustment risk in line with Article 3(2) to (5) Draft RTS, with a limited possibility to recognize netting and hedging ("Risk-Types Approach"). As a consequence, credit institutions facing exposures to such crypto-assets would have to compute own funds requirements for the above types of risk. In respect of the own funds requirements for the credit risk, credit institutions would have to apply the 1,250% risk weight (Article 3(2) Draft RTS). In practical terms, a credit institution subject to a total capital ratio of 8% would face a requirement to have own funds equal to 100% of the respective crypto-asset exposure.
• In contrast, with regard to crypto-assets not meeting the criteria under Article 3(1) Draft RTS (i.e. not being referenced by exchange traded products), credit institutions will have to (i) identify all trading book and non-trading book crypto-asset exposures and (ii) compute a risk weighted exposure amount for each position by applying a general risk weight of 1,250% ("General 1,250% RW Approach"). This translates in a requirement to have own funds equal to 100% of the respective crypto-asset exposures. Unlike the Risk-Types Approach, the General 1,250% RW Approach remains silent on whether own funds requirements for further risk types have to be computed in addition to such capital charge.⁹ In any case, given 1:1 own funds coverage, the application of further own funds requirements under the CRR to a direct holding of crypto-assets does not seem to add any additional protection. In contrast, in case of leveraged derivatives with Point (c) crypto-assets as underlyings the application of own funds requirements for counterparty credit risk and market risk could be sensible.

Given that, in line with Article 501d(2) point (c) CRR III, under both the Risk-Types Approach and the General 1,250% RW Approach a risk weight of 1,250% is applied (in case of the Risk-Types Approach, when computing the own funds requirements for credit risk), the question is why the EBA would distinguish between exchange traded and other Point (c) crypto-assets. The key difference between two approaches seems to be that, in line with the BCBS Standards, when computing market risk, positions in crypto-assets falling within the scope for the Risk-Types Approach will be eligible for netting (whereby when netting long positions against short positions a factor of 0.65 is proposed to be applied to the total amount in the subtrahend) (Article 3(4) Draft RTS). However, in terms of the level of capital charges, it is questionable whether the proposed Risk-Types Approach would be more beneficial to credit institutions with a flat trading book and non-trading book positions.

Eligible exposures in crypto-assets meeting the criteria in Article 3(1) Draft RTS

Crypto-asset exposures that are eligible for the Risk-Types Approach need to meet specific criteria outlined in Article 3(1) Draft RTS ("Hedging Recognition Criteria"). In a first step, EBA distinguishes between (i) direct holdings of the crypto-asset (i.e. the case where the credit institution holds the respective token on its balance sheet) and (ii) exchange-traded funds ("ETF"), exchange-traded notes ("ETN") and derivative positions with crypto-assets as underlying (or derivatives referencing other derivatives with crypto-assets as underlying).

• A direct holding of a crypto-asset would be eligible for the Risk-Types Approach, if it constitutes the underlying of a financial instrument, such as ETF, ETN and derivatives, that is traded on a regulated exchange (and in the case of a derivative, is cleared through a qualifying central counterparty) (Article 3(1) (a)(i) Draft RTS).
• In addition, the prudential treatment under the Risk-Types Approach shall be available for an ETF, ETN and/or derivative that references a crypto-asset, if such instruments have been explicitly approved by the competent authority for trading or the derivative is cleared by a qualifying central counterparty (Article 3(1) (a)(ii) Draft RTS). This also applies in a case, where instruments reference the above instruments (Article 3(1) (a)(iii) Draft RTS).
• Finally, a derivative or an ETF or an ETN that references a crypto-asset-related reference rate published by a regulated exchange that clears trades using this reference rate through a qualified central counterparty would be eligible for such treatment as well (Article 3(1) (a)(iv) Draft RTS).

Risk-Types Approach: Own funds requirements for Point (c) crypto-assets referenced by exchange-traded financial products

Below, we first outline the own funds requirements that are proposed to be applied to exposures to Point (c) crypto-assets meeting the criteria set out in Article 3(1) Draft RTS.

Own funds requirements for credit risk

Article 3(2) Draft RTS provides that credit institution shall compute own funds requirements for credit risk based on the standardized approach under the CRR (Part Three, Title II, Chapter 2). An internal model must not be used for this purpose. However, instead of risk weights that are assigned to different types of exposures under the CRR, the credit institution will have to apply a general 1,250% risk weight.

By way of example, under the CRR, as in the case of cash items and gold bullion, a direct holding of Bitcoin would actually qualify as "other items" within the meaning of Article 112 (q) CRR. Pursuant to Article 134(3) and (4) CRR, the risk weight that is assigned to cash items and gold bullion held in own vaults is set at 0%. Such prudential treatment will not be available for Point (c) crypto-assets which are held in bank's own crypto-wallets. Instead, the credit institution will always have to apply a risk weight of 1,250% to thereto-related exposures. This is surprising in the context of the Risk-Types Approach. While there is no doubt that both trading book and non-trading positions in crypto-assets, such as Bitcoin, are subject to a significant market risk, the crypto asset in "self-custody" does not per se expose the credit institution to the risk of a defaulting third-party. That said, this is in line with Article 501d(2) point (c) CRR III which introduces a general risk weight of 1,250 % and does not leave any room for a distinction between various risk types.

When computing the own funds requirements for credit risk, the credit institutions will not be able to accept crypto-assets as an eligible form of collateral for credit risk mitigation purposes (see Article 3(7) Draft RTS). The combination of the 1,250% RW and the collateral ban will de facto prevent EU credit institutions from meaningful engagement in crypto-trading activities. While there is no doubt that crypto-assets mostly exhibit a high volatility profile, it is not clear why the EU legislator would address such risk via requirements for credit risk. A more risk-sensitive approach would tailor the own funds requirements for market risk to crypto-assets factoring in sufficient haircuts. In fact, Article 3(4) Draft RTS introduces such approach (see below). However, such own funds requirements for market risk will have to be applied in addition to own funds requirements for credit risk (i.e. in addition to 1,250% risk weight). Such capital charge will de facto restrict bank's business activities in respect of Point (c) crypto-assets.

Counterparty credit risk

Credit institutions engaging in transactions giving rise to the CCR will have to compute own funds requirements for the CCR under the CRR. Article 3(3) Draft RTS proposes some transaction-specific amendments to such rules, such as (i) a volatility adjustment of 30% for institutions that lend these crypto-assets in the context of securities financing transactions, (ii) adjustments for the computation of the potential future exposure ("PFE") which include the introduction of a supervisory factor of 32% and the supervisory volatility of 120% as well as (iii) the requirement for separate hedging sets for each crypto-asset priced in a currency or in another crypto-asset (if exchange-traded).

Market risk

When computing own funds requirements for market risk, credit institutions will have to use the standardized approach taking into account some specifications set out in Article 3(4) Draft RTS. In contrast to Point (b) crypto-assets, other approaches, such as the alternative standardized approach, cannot be used.

In general, similar rules apply as in the case of Article 2(4) Draft RTS (see above). However, banks will have to compute such own funds requirements (i) separately from market risk for traditional assets, (ii) identify their positions for each different market and exchange where such crypto-assets are traded and (iii) calculate separate long and short gross sensitivities based on a modified risk factor structure.

One of the key factors that will affect banks' ability to engage in crypto-asset related trading activity and act as liquidity provider in this space is related to their ability to offset their long positions and short positions in a specific crypto-asset. Capital charges not allowing to offset long and short positions affect the capital cost and consequently the underlying economics of market making activity. In this respect, Article 3(4) Draft RTS proposed to include a factor of 0.65 which quantifies how much the smaller position (short or long) may offsets the larger one (long or short). The introduction of such "haircut" (i.e. 35% of the total exposure amount) accounts for the significant volatility in crypto markets (in addition to modified long and short gross sensitivities).

Credit valuation adjustment risk

Similar rules are proposed to be applied as in case of Article 2(5) Draft RTS (see above).

General 1,250% RW Approach: Own funds requirements for Point (c) crypto-assets not referenced by exchange-traded financial products

Crypto-assets not meeting the criteria set out in Article 3(1) Draft RTS will be subject to prudential treatment pursuant to Article 3(6) Draft RTS. First, they will have to identify all trading book and non-trading book crypto-assets exposures (Article 3(6) lit. a Draft RTS). In a second step, for each crypto-asset, credit institutions will have to determine picks whichever is larger: the absolute value of long positions or short positions of the respective crypto-asset. The larger absolute amount is assigned a 1,250% risk weight. Some specifications apply with regard to CCR in cases involving (leveraged) transactions, such as SFT and derivatives.

Outlook

The consultation on the Draft RTS ends on 8 April 2025. The EBA invites comments on all proposals in the Draft RTS.

EBA will issue its final version of the Draft RTS and officially submit the final Draft RTS to the Commission until 10 July 2025. The Commission will then adopt the RTS in the form of a Delegated Regulation, which will apply in addition to the requirements under Article 501d CRR III.

It is not overstated to note that the transitional regime proposed for prudential treatment of Point (c) crypto-assets under the Draft RTS will dramatically affect the extent to which the credit institutions in the EU will be able to participate in the EU crypto-markets until 2026. This will have significant implications for both (i) the EU banks in traditional financial sector and (ii) the EU crypto-market in general.

Ultimately, these transitional rules will be replaced by a permanent set of rules supposed to be proposed by the Commission by 30 June 2025.

Stéphane Blemus (White & Case, Associate, Paris) and Julian Burhenne (White & Case, Knowledge Management, Frankfurt) contributed to the development of this publication.

_{1 See the speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the Conference on MiCAR and its coordination with EU financial markets legislation, https://www.bankingsupervision.europa.eu/press/speeches/date/2023/html/ssm.sp231114~fd1b2cc234.en.html
2 GFMA, AFME, ASIFMA, SIFMA, ICMA, IIF, ISDA, FSF, FIA, ISFA and BPI, "Joint Response to the BCBS Second Consultation on the Prudential Treatment of Crypto-asset Exposures", 31: https://www.icmagroup.org/assets/Joint-TA-response-to-BCBS-2nd-consultation-crypto-assets-30092022.pdf
3 Latest version of the BCBS Standards, July 2024, https://www.bis.org/basel_framework/chapter/SCO/60.htm?inforce=20260101&published=20240717.
4 Notably, the CRR III also includes disclosure and reporting obligations in relation to crypto-asset exposures (see Articles 430 and 451b CRR III).
5 In the US, most recently, Larry Fink, CEO of Blackrock in an interview with CNBC appealed to the SEC to approve the tokenisation of bonds and stocks, see BlackRock CEO Larry Fink: I want the SEC to rapidly approve the tokenization of bonds and stocks.
6 European Banking Authority, "Report on tokenised deposit", EBA/REP/2024/24, December 2024.
7 These include well-known stablecoins, such as the USDC, EURC or EURCV.
8 At the time of publication of this Client Alert, popular examples include the PAX Gold, being a stablecoin tracking 1:1 the value of gold, the DIAM, tracking the value of diamonds. Notably, Meta's project of a digital currency, the so-called DIEM, which was ultimately abandoned, would have also fallen into this category.
9 Given EBA's intention to subject these types of exposure to a similar treatment as set out in the BCBS standards (see part 3.1.2. of the EBA consultation paper), it seems likely that the 1250% RW is supposed to capture all risk categories, with no need for additional calculations. In contrast to the BCBS Standards, however, where this is clarified in para 60.83, an equivalent statement in the Draft RTS is missing.}

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