Senator Cynthia Lummis led a group of six senators in a letter to the three most powerful US banking regulators, asking them to develop a new capital framework for digital assets held on bank balance sheets.
The letter, sent on May 27 to Federal Reserve Vice Chair for Supervision Michelle Bowman, FDIC Chairman Travis Hill and Comptroller of the Currency Jonathan Gould, is the clearest signal yet that Congress intends to force the banking system's door open to crypto.
The 1,250% problem
Under current Basel Committee standards, banks that hold cryptocurrency on their balance sheets must apply a 1,250% risk weight. In practice, this means a bank holding $1m in Bitcoin must set aside $1m in capital against it, making the position economically worthless.
The senators called this a "de facto ban" on banks holding digital assets. They are right. No commercial bank will allocate balance sheet to an asset class that requires dollar-for-dollar capital backing. The risk weight was designed to discourage the activity, and it has worked.
The letter asks regulators to replace this framework with one that "accurately reflects the opportunities and risks of digital assets," which is polite language for a substantial reduction in the capital charge.
The CLARITY Act
The senators flagged that forthcoming legislation, the CLARITY Act, would explicitly authorise banks to use digital assets and blockchain for payments, lending, custody and trading. The bill needs accompanying capital guidance to function, because without a workable risk-weighting framework, the legal permission is meaningless.
Senate leaders are pushing to resolve differences between the Banking and Agriculture committee versions of the bill and advance it before the midterm elections. Debate resumed this week after the Senate returned from recess.
Who benefits
The obvious winners are the large US banks. JPMorgan, Goldman Sachs and Morgan Stanley have built digital asset capabilities but remain constrained by the capital rules. A lower risk weight would allow them to custody crypto, extend crypto-collateralised loans and trade digital assets at scale.
Crypto exchanges like Coinbase would face new competition but also gain legitimacy. If banks enter the market, the asset class is no longer fringe. It is infrastructure.
The risk nobody wants to price
The 1,250% risk weight exists for a reason. Crypto assets are volatile, operationally complex and have a short track record relative to traditional financial instruments. The Basel Committee applied the harshest possible capital charge because it concluded the risks were not well understood.
Reducing that charge is a policy choice, not a technical correction. It shifts risk from the crypto market onto the banking system, and by extension onto depositors and taxpayers.
The senators framing the current rules as a ban is effective politics. Whether it is sound prudential regulation is a different question, and it is one the letter does not attempt to answer.
