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EU wants banks to back every digital asset held with fiat in new prohibitive measures

European banks will now have to back every digital asset they hold with their fiat capital, according to a new draft bill by European legislators.

The bill, which the European Parliament’s Economic and Monetary Affairs Committee voted on recently, is the region’s latest effort to curb the integration of digital assets into the traditional financial system. They come just weeks after the Bank for International Settlements (BIS) proposed similar prohibitive measures on banks holding digital assets.

“Banks will be required to hold a euro of their own capital for every euro they hold in crypto,” Markus Ferber, a center-right German member of the European Parliament, said.

“Such prohibitive capital requirements will help prevent instability in the crypto world from spilling over into the financial system. Over the past couple of years, we have seen that crypto assets are high-risk investments,” he added.

The bill is the lawmakers’ response to recent events in the digital asset world, a note accompanying the proposed draft states:

“The existing prudential rules are not designed to adequately capture the risks inherent to cryptoassets. This is even more urgent in light of the recent adverse developments in cryptoasset markets.”

While the note didn’t name any specific events, the collapses of Celsius, BlockFi, Voyager Digital, Three Arrows Capital (3AC), and most recently, FTX have spooked regulators who now want to insulate the banking system from such shocks.

Following the Committee’s vote, the new draft bill will now head to the rest of the European Parliament for a vote. Negotiations with national finance ministers and possible amendments would then follow before it becomes law.

While it’s targeting digital assets, a European banking lobbying group has expressed concerns that the draft bill could affect other legal tokenized assets.

“There is no definition of crypto assets in the [legislation], and therefore, the requirement may apply to tokenized securities, as well as the non-traditional crypto assets the interim treatment is targeted at,” a statement from the Association for Financial Markets in Europe stated.

The group called on legislators to clarify the scope of application of the new draft bill.

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