The Basel Committee on Banking Supervision has dealt with cryptocurrencies. Punitive new proposals from the standards body can ensure Bitcoin stays on the fringes of regulated finance. However, safer areas of the blockchain and crypto world are still accessible to JPMorgan (JPM.N), HSBC (HSBA.L) and others. It’s a good balance between prudence and progress.
The Swiss-based banking supervisory team, chaired by the Spanish interest rate setter Pablo Hernández de Cos, drafts international standards that are implemented by local watchdogs. Thursday’s consultation paper goes harshly on high profile assets like Bitcoin and Ethereum.
The two most popular cryptocurrencies fall under the Group 2 designation of the Basel Committee, which is reserved for assets whose value fluctuates sharply or whose main players may be undetectable and unregulated. This means that a trading position or loan denominated in Bitcoin would be subject to a risk weight of 1,250%. So a $ 100 million asset would appear on the bank’s balance sheet as $ 1.25 billion, forcing an 8% equity ratio lender to hold $ 100 million in equity.
Such harsh treatment will make it uneconomical for large banks to facilitate Bitcoin trading when dealing with bonds or currencies. Loans to customers who want to buy or sell the asset short would face similar penalties. Hedge funds, corporations, and other crypto-curious counterparties must look to industry specialists like Coinbase Global (COIN.O) valued at $ 47 billion.
The suggestions go into more monotonous areas of cryptocurrency. Basel’s Group 1 designation includes tokenized assets such as As long as the underlying risks and property rights are the same, the standard-setters see no reason to massively increase capital requirements. The treatment of stablecoins, or cryptocurrencies, the value of which is tied to a more stable asset such as the U.S. dollar, depends on the strength of the underlying claims.
This gives lenders permission to experiment with the underlying innovations of crypto without piling up in volatile Bitcoin. Bankers may be afraid of missing out, but the sector is still young. The total value of the 10 largest cryptocurrencies is $ 1.3 trillion, according to CoinMarketCap. JPMorgan’s balance sheet alone is roughly three times as large. The supervisory authorities are careful to ensure that cryptocurrencies, at least in their current form, remain largely outside the regulated banking system.
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– Banks must provide enough capital to fully cover losses from Bitcoin holdings, the global regulators of the Basel Committee on Banking Supervision suggested on June 10th.
– The Swiss-based body that sets international standards that are then implemented by local watchdogs advocates a dual approach to capital requirements for crypto assets.
– The first part covers so-called tokenized assets, where the ownership of traditional securities such as bonds is recorded over a distributed computer network or secured by cryptography and other similar techniques.
– These assets could be subject to a similar capital requirement as the underlying financial products, with “add-ons” to address the risk of unexpected technological problems.
– The second group includes cryptocurrencies such as Bitcoin, which, due to their “unique risks”, would be subject to a new “conservative regulatory treatment” with a risk weighting of 1,250% for the purpose of calculating capital requirements.
– The consultation ends on September 10th.
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