U.S. Republican senators urged financial regulators to review banks' capital rules for digital assets. They say current rules impose excessive capital burdens on holdings such as bitcoin (BTC), effectively blocking banks from participating in the market.

Coinpost, a blockchain media outlet, reported on Thursday that 6 Republican senators, including Cynthia Lummis (신시아 루미스), who leads the Senate Banking Committee's digital assets subcommittee, sent a joint letter on May 27 to the Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency. They called for clearer standards for capital rules related to digital assets.

In the letter, the lawmakers said a fairer and more consistent regulatory framework is needed for digital assets that are included on banks' balance sheets.

The lawmakers' move followed U.S. financial regulators' release in March of an FAQ on standards for applying capital rules to tokenised securities. At the time, the Fed, the FDIC and the OCC said the capital treatment of tokenised assets should be based on the risk characteristics of the underlying asset, not the record-keeping technology. The Republican lawmakers said the same principle should apply to bitcoin and other digital assets.

At the centre of the debate is the Basel Committee on Banking Supervision's capital rules for cryptocurrencies, an international bank regulatory standard. The Basel Committee finalised its capital framework for digital assets in 2022. Under the standard, cryptocurrencies such as bitcoin that do not meet certain requirements are assigned a 1,250 percent risk weight.

A risk weight is a metric that determines how much capital a bank must hold depending on the risk of an asset. A 1,250 percent risk weight effectively means a bank must separately hold capital equivalent to the asset's value.

The lawmakers criticised it as a "very strict category". The letter said the current system imposes uniformly high capital burdens across digital assets rather than conducting a detailed assessment of each asset's risk characteristics. As a result, banks are effectively finding it difficult to hold cryptocurrencies such as bitcoin or participate in related businesses, they said.

Technology neutrality also emerged as an issue. The lawmakers said it lacks consistency for regulators to apply rules to tokenised securities based on the risk of the underlying asset while imposing separate high risk weights on other digital assets. They said regulation should be designed based on actual risk levels rather than a specific method of technological implementation.

The move also aligns with ongoing discussions in the U.S. Congress on overhauling cryptocurrency rules. The lawmakers noted that the Basel Committee has signalled a review of its crypto capital framework in November. They also stressed that the CLARITY bill, a digital asset market structure bill now under discussion in Congress, could influence the regulatory direction.

Market participants see the debate as a factor that could determine whether banks expand cryptocurrency businesses. If the current high risk weights remain, banks will inevitably face significant constraints in directly holding bitcoin or expanding related services. If a new regulatory framework that reflects asset-specific risk characteristics is put in place, banks' scope for market participation could expand substantially.

The Republican lawmakers said at the end of the letter that they would work with regulators to maintain the competitiveness and innovation capacity of U.S. financial markets and strengthen the dollar's international standing.

Attention is now on whether the Fed, the FDIC and the OCC will move to develop new capital guidelines for digital assets and how a review of Basel rules and U.S. legislative discussions will be linked.