Basel's 1250% Mistake
Why Basel’s Bitcoin Capital Treatment Is a Category Error—and How to Fix It
Executive Summary:
The Basel Committee's prudential standard for cryptoasset exposures (SCO60) assigns Bitcoin a 1,250% risk weight under Group 2b, the most punitive classification in the entire capital framework. This treatment is a category error. It applies a tool designed for opaque, unrateable securitization tranches to a transparent, globally traded, zero-counterparty-risk asset whose risks (volatility, liquidity, operational) are measurable, hedgeable, and already addressable through existing Basel market-risk and operational-risk frameworks.
The 1,250% weight, in effect, serves less as an objective assessment of risk, but as a normative judgment against Bitcoin laundered through the language of prudential regulation.
A 1,250% risk weight, multiplied by the 8% minimum capital ratio, produces a capital requirement equal to 100% of the exposure: dollar for dollar. With buffers and internal targets, the effective requirement exceeds the exposure. A bank holding $100 million in Bitcoin must allocate $100 million or more in capital against a position that generates no yield. Under any reasonable hurdle rate, this is functionally equivalent to a capital deduction: the business case for regulated-bank Bitcoin intermediation is dramatically harmed, if not eliminated entirely.
When the capital framework makes bank intermediation uneconomic, Bitcoin services suffer. American capital markets are renowned worldwide for the depth, sophistication, and regulatory credibility of their financial services. Yet those services are artificially constrained from extending to an asset class that now supports over 150 companies holding over 1.1 million bitcoin worth $78 billion in corporate Bitcoin treasury holdings, hundreds of billions in annual trading volume, and a mature derivatives complex. The result is a widening gap between the demand for regulated Bitcoin services and the banking system's ability to supply them.
We recommend three tiers of reform:
Immediate — clarify that pure agency custody is capitalized under the operational risk framework and provide a supervisory pathway for limited Bitcoin intermediation.
Medium-term — replace the fixed 1,250% default with a conservative FRTB-based market-risk approach plus operational-risk add-ons, and substitute graduated concentration limits for the binary 2% cliff.
Long-term — create a "non-issuer digital commodity" category with capital determined by measurable risk dimensions rather than technology labels.
