Banks must provide enough capital to fully cover losses from Bitcoin holdings, suggested global regulators on Thursday in a “conservative” move that could prevent large lenders from widespread use of the cryptocurrency.

The Basel Committee on Banking Supervision, made up of regulators from the world’s leading financial centers, has proposed a twofold approach to capital requirements for crypto-assets held by banks in its first custom-made rule for the emerging sector.

El Salvador is the first country in the world to adopt Bitcoin as legal tender, despite central banks around the world repeatedly warning that investors in the cryptocurrency must be prepared to lose all of their money.

Large economies like China and the United States have signaled a tougher approach in recent weeks and developed plans to develop their own central bank digital currencies.

The Switzerland-based Basel Committee said in a consultation paper that while banks’ exposure to crypto assets is limited, their continued growth could increase the risks to global financial stability from fraud, cyberattacks, money laundering and terrorist financing if capital requirements are not in place become.

Bitcoin and other cryptocurrencies are currently valued at around $ 1.6 trillion worldwide, which is still tiny when compared to bank holdings of loans, derivatives, and other major assets.

The Basel rules require banks to assign “risk weights” to different types of assets on their books, which are then added together to determine total capital requirements.

Basel proposes two broad groups for crypto assets.

The first includes certain tokenized traditional assets and stablecoins that fall under the existing rules and are treated in the same way as bonds, loans, deposits, stocks, or commodities.

This means that the weight could range between 0% for a tokenized government bond and 1,250% or the full value of the funded asset.

The value of stablecoins and other Group 1 crypto assets is tied to a traditional asset, like the dollar in the case of Facebook’s proposed stablecoin Diem.

However, given that cryptoassets are based on a new and rapidly evolving technology like blockchain, this carries a potentially increased likelihood of operational risks that require an “additional” capital requirement for all types, Basel said.

“UNIQUE RISKS”

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%.

Bitcoin and other cryptocurrencies are not associated with any underlying asset.

According to the Basel rules, a risk weight of 1,250% means that banks must hold capital that is at least equal to the value of their exposure to Bitcoin or other Group 2 crypto assets.

“The capital will be sufficient to absorb a full write-off of the crypto asset exposures without exposing depositors and other senior creditors to the banks,” she added.

Joseph Edwards, head of research at crypto broker Enigma Securities, said a global regulatory framework for crypto assets is positive as banks in Europe are divided over exposure to the sector.

“If something is to be treated as a universal good, it actually has to meet the quorum on the number of parties that will deal with it. That should move the needle,” Edwards said.

Bitcoin gained after the Basel announcement, trading 1.5% to $ 37,962 at 1053 GMT.

There are few other assets that are treated so conservatively under the existing Basel rules and include investments in funds or securitisations where banks do not have sufficient information about their underlying exposures.

Bitcoin’s value has fluctuated a lot, hitting a record high of around $ 64,895 in mid-April before slumping to around $ 36,834 on Thursday.

Banks’ appetites for cryptocurrencies vary, with HSBC (HSBA.L) saying it has no plans for a cryptocurrency trading desk because the digital coins are too volatile. Goldman Sachs (GS.N) resumed its crypto trading desk in March. Continue reading

Basel said that given the rapidly evolving nature of crypto assets, further public consultation on capital requirements is likely before final rules are released.

Central bank digital currencies are not included in their proposals.

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