A recent article from Reuters reports that the lawmakers of the European Union have cast their votes in favor of enforcing stringent capital requirements on banking institutions that deal with cryptocurrencies.

The underlying intention behind this move, according to Markus Ferber, the economic spokesperson for the European People’s Party in the EU parliament, is to “keep the volatility in the crypto universe from seeping into the financial system.” To achieve this, the legislators propose that “for every euro of cryptocurrency held by banks, an equal euro of their own capital must be held in reserve.”

The turbulence witnessed in the markets over the past several months served as an impetus to enforce this kind of regulation. The collapse of entities such as FTX and Celsius is still etched in the minds of users, heightening the anticipation for this law to pass. This new rule is perceived to be part of a broader suite of regulations aiming to align the EU with global standards.

The proposed regulation echoes the recommendations of the Bank for International Settlements’ Basel Committee, which also suggested imposing the highest risk weight category on holdings of “unbacked crypto.” Their guidelines limited Tier 1 capital held in unbacked cryptocurrencies to 2%.

However, there are concerns about the clarity of the legislation as there is no clear definition of crypto assets within it. This means that it may apply to tokenized securities as well as non-traditional crypto assets it is aimed at. The Association for Financial Markets in Europe (AFME), an EU lobby group representing financial institutions like investment banks, brought up this issue but noted that these uncertainties could be ironed out in later drafts.

Despite the approval of these measures by the European Parliament’s Economic and Monetary Affairs Committee, they must also receive approval from the entire European Parliament. Furthermore, they need to be presented to national finance ministers at a meeting of the Council of the European Union for them to be fully enacted.

This decision marks a significant turning point in the crypto economy and the wider financial landscape, signaling an increase in regulatory scrutiny for cryptocurrencies. While it may bring challenges, it also offers a clear path for financial institutions to safely and responsibly engage with the evolving world of digital assets.