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Global banking regulators have proposed that cryptocurrencies come with the most stringent bank capital requirements of any asset.
This move would mean that banks would have to set aside enough capital to fully cover potential losses on bitcoin and similar crypto assets.
The Basel Committee on Banking Supervision, which is made up of regulators from the world’s major financial centers, is proposing a “new conservative prudential treatment” for crypto assets.
The world’s most powerful banking standards body says the growth of crypto assets could increase global financial stability issues and risks to the banking system, so it offers to address those risks.
In his proposal, it says:
Cryptoassets have raised a variety of concerns, including consumer protection, money laundering and terrorist financing, as well as their carbon footprint. The Committee believes that the growth of crypto assets and related services is likely to raise financial stability issues and increase the risks facing banks.
Some crypto assets have exhibited a high degree of volatility and may pose risks to banks as exposures increase, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); risk of money laundering / terrorist financing; and legal and reputational risks.
Under the Basel plan, crypto assets would be divided into two groups. It says:
- Group 1 cryptoassets – these meet a set of classification conditions and, as such, are eligible for treatment under the existing Basel framework (with some additional modifications and guidance). These include some traditional tokenized assets and stablecoins.
- Group 2 cryptoassets – are those, like bitcoin, which do not meet the conditions for classification. As the latter present additional and higher risks, they would be subject to a new conservative prudential treatment.
Group 2 the assets would attract a 1250% risk weight (the level reserved for the riskiest investments in Basel’s eyes), and signify a 100% capital requirement in practice.
So, a $ 100 exposure would mean holding $ 100 of capital.
[this will also apply to short positions, which could theoretically lead to unlimited losses. So, a bank shorting bitcoin would need to show those risks and could face an additional capital charge].
Group 1 would face the same capital requirements as traditional assets such as bonds, loans, deposits, stocks or commodities, with the possibility of capital increases.
To qualify for Group 1, a stablecoin would have to show that it was fully booked at all times (i.e. if it was pegged to the dollar, it should have enough dollars behind it).
The Basel committee also said these standards would apply to assets created for decentralized finance (DeFi) and non-fungible tokens (NFTs) if they met the definition of crypto-assets.
But they do not cover central bank digital currencies (such as a digital US dollar, or “Britcoin”, considered by the Bank of England).
Few other assets benefit from such conservative treatment under existing Basel rules, and include investments in funds or securitizations for which banks do not have sufficient information about their underlying exposures.
The Basel proposals come as global regulators grapple with the rapid emergence of digital assets and growing investor interest. U.S. officials are also keen to take a more active role in overseeing the $ 1.5 billion cryptocurrency market over concerns that a lack of oversight could harm investors in the highly volatile and speculative industry.