Banks are struggling to meet growing institutional demand for Bitcoin due to restrictive capital requirements that make holding the cryptocurrency on balance sheets economically unviable.Despite rising interest in digital assets, current Basel Committee rules are pushing banks to the sidelines of a market they say they are eager to enter, according to a report by The Banker.Arnab Sen, CEO of GFO-X, a UK-based digital asset derivatives exchange, warned that regulatory constraints are preventing traditional financial institutions from participating in crypto markets.Speaking at the Financial Times’ Digital Assets Summit in London, Sen said, “The market is crying out for banks to intermediate Bitcoin trading and collateral services, but the existing rules make it almost impossible.”Basel Rules Treat Bitcoin as High-Risk AssetAt the heart of the issue is the Basel framework, which assigns a 1,250% risk weight to unhedged crypto holdings such as Bitcoin—essentially treating the asset as highly speculative.This classification significantly increases the amount of capital banks must hold to support such exposures, rendering the business case unattractive.“These rules are freezing banks out of the space,” Sen said in an interview with The Banker. “There’s strong demand from institutional clients, but it’s just not viable for banks under current regulations.”This regulatory bottleneck is driving trading activity toward unregulated platforms or non-bank intermediaries, raising concerns about market oversight and systemic risk. $1.6 TRILLION BANK OF AMERICA’S CEO SAYS US BANKING INDUSTRY WILL SOON EMBRACE CRYPTO FOR PAYMENTS IT’S HAPPENING pic.twitter.com/PrNDFI6k9x— Vivek (@Vivek4real_) January 26, 2025 Sen noted that conversations are already underway among global regulators to revisit the treatment of Bitcoin under Basel rules. He expressed optimism that changes could be on the horizon.“I believe the Basel approach will be reviewed this year,” he said during a panel discussion on institutional crypto adoption. “There’s lobbying underway because institutional demand is growing rapidly.”Marcus Robinson, head of CDSClear and DigitalAssetClear at the London Stock Exchange Group, echoed these sentiments, saying institutions are showing “increasing interest and comfort” with crypto.Institutions Eyeing Crypto-Backed LendingRoger Bayston, head of digital assets at Franklin Templeton, added that firms are especially exploring ways to lend against crypto assets.Sen pointed to the recent repeal of SAB 121 in the U.S.—which had imposed accounting burdens on crypto custodians—as a key turning point that could open doors for banks to provide custody services.He described the repeal as “the first step” toward broader institutional participation.“The next intellectual step,” Sen said, “is to rethink how Bitcoin is treated on bank balance sheets.”According to a recent survey by Coinbase and EY-Parthenon, 86% of institutional investors surveyed said they had exposure to digital assets or planned to make allocations to cryptocurrencies in 2025.Besides, thanks to the evolving regulatory landscape worldwide, institutions are increasingly viewing cryptocurrencies as a legitimate component of a balanced investment strategy.Gadi Chait, Investment Manager at Xapo Bank, said in a recent interview that historically, institutional investors have been deterred by several factors, particularly crypto volatility concerns.However, he added that with more awareness and research, investors are understanding the varying degrees of risk and utility.The post Banks Stifled by ‘Punitive’ Capital Rules Amid Rising Bitcoin Demand appeared first on Cryptonews.

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