Cryptocurrencies on a bank’s balance sheet

Abstract

More and more established companies are getting involved in the cryptomarket and/or considering cryptocurrencies as an alternative to cash. In addition, recently, El Salvador became the first country to declare Bitcoin as a legal tender. Against this background, this paper examines how holdings of cryptocurrencies on a bank’s balance sheet would be treated under EU banking law. After a brief consideration of the permissibility of investments in cryptocurrencies, the accounting under the International Financial Reporting Standards and the Bank Accounts Directive is explored. The analyses confirm that long-term holdings must be classified as intangible assets. Building on this, the prudential implications for credit institutions are assessed and, in particular, how banks must treat cryptocurrencies under the Capital Requirements Regulation. Because Bitcoin & Co qualify as intangibles under the applicable accounting rules, European institutions must fully deduct their holdings from the Common Equity Tier 1 capital. This outcome is compared with the recent consultation of the Basel Committee on Banking Supervision on crypto exposure.

Keywords: Cryptocurrencies, Bitcoin, Ether, Accounting, IFRS, IAS, Bank Accounts Directive, Credit Institution, CRR, Capital Requirements, CET1, Basel

JEL Classification: G21, G28, K22, K23, M41, M48