With bitcoin finally breaking back above $38K for the first time in the better part of a week (maybe the FBI has finally finished dumping that crypto "ransom" from the Colonial Pipeline hack?) the FT has just revealed that the Basel Committee on Banking Supervision, the world's most powerful regulator of banking standards and rules, has decided how banks hoping to hold cryptocurrency on their balance sheets will need to treat it in what is being interpreted as the market as a major 'win' for digital-currency adoption.
The new proposal from the Basel Committee is being interpreted as a global regulators giving eager megabanks a green light to finally hold "volatile" cryptocurrencies like bitcoin, ethereum and "pawgcoin" on their balance sheet. This is hardly surprising, since banks like JPM, Goldman and Citi have already launched their own crypto-focused businesses. However, the proposal also shows that these banks will need to treat crypto as among the riskiest assets they can own.
The reason? According to the Committee, crypto assets carry risks including market and credit risk (which they share with other types of assets), but also "fraud, hacking, money laundering and terrorist financing risk."
Banks with exposure to volatile cryptocurrencies should face stricter capital requirements to reflect the higher risks, said the Basel Committee on Banking Supervision, the world’s most powerful banking standards-setter.
Its intervention came in a report released on Thursday as policymakers around the world step up plans to regulate the fast-emerging market.
The Basel committee acknowledged that while banks’ exposure to the nascent crypto industry was limited, "the growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks."
Among the risks it cited included market and credit risk, fraud, hacking, money laundering and terrorist financing risk.
Basel is willing to make some exceptions for certain crypto-assets, like stock tokens and stablecoins, so long as they are "fully reserved at all times" (which would, it's worth noting, disqualify tether, the world's most popular stablecoin). NFTs would also face the toughest standards, while central bank currencies (a group that presently consists only of the digital RMB) were left outside the scope.
Some assets, such as stock tokens, would fit into modified existing rules on minimum capital standards for banks. Others, such as bitcoin, would face a new “conservative” prudential regime, it recommended. Stablecoins — cryptocurrencies pegged to traditional assets such as currencies — would also qualify for existing rules if they were fully reserved at all times, the committee said. Banks would have to monitor that this was “effective at all times”, it added.
But for bitcoin and ethereum, however, the new "conservative" risk weighting that Basel is pushing is 1,250%, which is in line with the minimum requirement for the riskiest stocks and junk bonds. This would require banks to hold $1 dollar for every $1 in "exposure" to those assets.
All other crypto assets, including bitcoin and ethereum, would go into the new more strenuous regime. The Basel committee proposed a risk weight of 1,250 per cent, in line with the toughest standards for banks’ exposures on riskier assets. That would mean banks would in effect have to hold capital equal to the exposure they face. A $100 exposure in bitcoin would result in a minimum capital requirement of $100, Basel said.
Banks have been waiting on baited breath for a whiff of the Basel Commmittee's thinking, and it seems that what was reported in the FT is in line with what most probably expected. Notably, the big exceptions are for "cryptoassets" that have the same legal standing as traditional assets, like the right to a dividend or other company cash flows.
The market took the news in stride, sending bitcoin higher as traders apparently interpreted it as a good sign especially after recent signs of growing regulatory wariness with digital currencies, particularly after the Colonial Pipeline "hack".
At this point, the big banks are getting into cryptocurrency because their customers and shareholders are demanding it. So American and banking authorities also need to take a more active role in supervising what has become a $1.5 trillion market.
And as more companies start getting involved with bitcoin, pretty soon banks will find that "exposure" to crypto is popping up in unexpected or unanticipated places, like this Bloomberg headline that hit last night which we couldn't help but notice:
- FED OWNS SMALL PIECE OF MICROSTRATEGY'S BITCOIN -LINKED JUNK BONDS: BBG