The Fed is readying to punish banks for holding Bitcoin as US crypto tensions boil over

A forthcoming Federal Reserve vote on a revised Basel capital proposal is poised to significantly influence how U.S. banks interact with Bitcoin. This rulemaking, expected to be voted on next week followed by a 90-day public comment period, could determine whether banks treat Bitcoin as a balance sheet hazard or allow for greater intermediation around it.

Key Regulatory Developments

Fed Vice Chair for Supervision Michelle Bowman announced that proposals covering Basel III and the G-SIB surcharge would be published soon. While most crypto investors may not focus on prudential terminology, the outcome directly impacts the availability of improved Bitcoin services from banks, the ease with which crypto firms can secure banking relationships, and the expansion of Wall Street integration beyond ETFs.

The current Basel framework imposes restrictive conditions. For instance, Group 2b cryptoasset exposures carry a 1250% risk weight, requiring banks to hold capital equal to the value of those exposures. Banks are expected to keep total Group 2 crypto exposure below 1% of Tier 1 capital, with harsher treatments applied if exposure exceeds 1% or 2%. For a bank with $100 billion in Tier 1 capital, this means keeping total Group 2 crypto exposure below approximately $1 billion, and facing full harsh treatment if it exceeds $2 billion.

A more workable path exists for Group 2a cryptoassets that meet hedging recognition criteria, such as the presence of regulated exchange-traded derivatives or ETFs/ETNs, and minimum liquidity thresholds. This path uses a modified market risk treatment with a 100% risk weight on the net position, a significant improvement over the 1250% for Group 2b, though still restrictive.

The table below summarizes the Basel categories and their implications:

Shifting Policy Focus: From Permission to Capital

Recent actions by U.S. banking regulators indicate a shift in focus from legal permission to economic capital treatment for crypto activities. In March 2025, the OCC reaffirmed that crypto custody, stablecoin activities, and participation in independent node verification networks are permissible for national banks. In April 2025, the Fed and FDIC withdrew previous joint statements, stating banks may engage in permissible crypto activities consistent with safety and soundness. Furthermore, in December 2025, the OCC allowed banks to act as intermediaries in “riskless principal” crypto transactions.

Despite these legal openings, harsh capital treatment under Basel remains a significant economic barrier. If the capital treatment remains punitive, large banks will likely continue to avoid substantial Bitcoin inventory, financing, and market-making services. Conversely, a softening of capital rules or a clearer path for lower-risk treatment could foster more bank custody, financing, execution, and infrastructure for Bitcoin.

Global Context and Potential Outcomes

Globally, the Basel Committee has been reviewing its cryptoasset standard. Bank exposures to cryptoassets were reported at just over €14 billion at the end of 2024, remaining limited and largely insulating the banking industry from crypto's price volatility. This context makes the U.S. debate particularly significant, as capital treatment is a key factor limiting crypto-bank integration.

The upcoming Fed proposal presents several potential outcomes:

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  Bull case: The U.S. draft offers a more workable path for hedged or lower-risk Bitcoin exposures, enabling banks to expand custody, financing, and market-making services, making Bitcoin more bankable.
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  Bear case: The proposal operationalizes harsh treatment clearly, restricting banks and keeping Bitcoin largely outside core banking functions.
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  Black swan: The draft hardens against Bitcoin due to national security or AML concerns, leading the U.S. to strategically keep Bitcoin on the periphery of the regulated banking system.

This Fed proposal is critical in defining whether banks view Bitcoin as bankable infrastructure or as balance sheet contamination, significantly impacting its long-term integration into the traditional banking system.