Looking at the current cryptocurrency market downfall I can only try thinking on how this can be stopped from a series of falling dominos. And for that to happen an external factor needs to come into to scene to prevent further collapse, something like the Basel Crypto Rules. I recently found out myself that these rules, formulated by the Basel Committee on Banking Supervision, aim to regulate the banking sector's exposure to crypto assets, ensuring stability and mitigating risks. In 2021, The Basel Crypto Rules were implemented and they proposed placing crypto as high-risk Group 2 set of assets. Crypto would have a 1,250% risk weight (which is quite very high), requiring banks to have capital equal to the value of its crypto exposure. Group 2 holdings were restricted to under 1% of the value of their Group 1 holdings. This way stability would be ensured against high market volatility.

Scope

The Basel Crypto Rules are crucial in maintaining financial stability as they enforce stringent capital requirements for banks dealing with volatile crypto assets. By mandating higher capital reserves, the rules aim to safeguard banks from the high volatility and potential financial losses associated with cryptocurrencies.

Risk management

One significant aspect of these regulations is their emphasis on risk management. Banks are required to classify their crypto asset exposures based on risk and allocate capital accordingly. This ensures that banks are adequately prepared to absorb losses without jeopardizing their overall financial health.

Transparency

Moreover, the Basel Crypto Rules promote transparency and accountability in the banking sector's dealings with cryptocurrencies. By compelling banks to disclose their crypto asset exposures and associated risks, these rules enhance investor confidence and contribute to the broader financial system's integrity.

These rules are continuously reviewed and adapted to their evolution with the aim of ensuring stability in the financial sector regardless of the crypto assets volatility. Through them it can be realized the integration of cryptocurrencies into the traditional financial system in a safely manner.

Bottom line is that they provide a structured framework for banks, balancing innovation in financial technology with the need for systemic stability and investor protection. This can only bring more trust into the space and expand the investor instruments on crypto, even if these are done though centralized entities. But as we are not all the same, some still prefer more traditional instruments of investments... but all of us simply participate to a new financial system powered through cryptocurrencies.

Posted Using InLeo Alpha