Banks facing stricter bitcoin regulation
Banks' holdings of bitcoin could be subject to the strictest capital adequacy requirements
The Basel Committee on Banking Supervision (BCBS) has proposed that banks which hold cryptocurrencies such as bitcoin or ether should face stricter capital requirements to reflect the higher risks involved in holding such assets.
The committee, which is based at the Bank for International Settlements (BIS), published a consultation calling for cryptocurrencies to carry the toughest bank capital rules of any asset.
The BCBS is arguing requirements for holding bitcoin and similar tokens should be far higher than those for conventional stocks and bonds.
The risk of crypto exposure
The Basel committee said exposure to crypto industry was limited but “has the potential to raise financial stability concerns and increase risks faced by banks”.
For cryptoassets, such as bitcoin, the Basel Committee is proposing a 1,250% weight risk. This means banks would have to hold capital that is at least equal to the exposure they face. For example, $100 exposure in bitcoin ”results in a minimum capital requirement of $100”, said BCBS.
Two types of cryptoassets
As part of its consultation, the Basel Committee is proposing that cryptocurrency capital asset requirements come under two groups.
The first – group one – includes tokenised traditional assets and stablecoins which would come under existing rules and would be treated in the same way as bonds, loans, deposits, equities or commodities.
The second – group two – includes cryptocurrencies like bitcoin or ether. These would be subject to “conservative prudential treatment”, hence the risk-weighting of 1,250%.
The committee said: “The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss.”
Other assets that are similarly treated under Basel’s rules include investments in funds or securitisations where banks do not have sufficient information about their underlying exposures.
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Bitcoin bull market
Bankers have warned the proposals – out for consultation until September – might prevent banks from investing in cryptocurrency. JPMorgan has already warned Basel’s consultation proposals could trigger a bitcoin bear market.
Fiorenzo Manganiello, partner LIAN group and a professor in venture capital and blockchain at the Geneva Business School, said more regulation could encourage the growth of centralised bank digital currencies (CBDC) backed by securities, such as cash, gold or oil, and regulated by national central banks.
He said CBDC are seen by BIS as a way for central banks to streamline key economic, financial and regulatory activities while safeguarding the public’s trust in money, maintaining stability and ensuring a resilient and safe payment system.
Manganiello added: “It will enable institutions to monitor bank wallets and transactions in real time, set currency thresholds and reduce the required balance in the account and create instant reporting on commercial banks.
"Central bank digital currencies have an advantage over cryptocurrencies as they provide the same services but with the safety net of reliable governance. The privacy component still exists but would be controlled to respect the regulations and laws of the country.
“We are beginning to see the cryptocurrency market lose one of its most competitive advantages in its concept of decentralisation and anonymity.”
Yves Renno, head of trading at Wirex, said Basel's was a positive step towards recognition and adoption through regulation. He said: "Weighting the risk of cryptocurrencies, and effectively over-collateralizing these holdings with more capital requirements, should eventually bring confidence, and therefore contribute to decrease volatility in the sector. "