LONDON: Banks must set aside enough capital to fully cover losses on all bitcoin holdings, global banking regulators proposed Thursday, in a “conservative” measure that could prevent large-scale use of crypto. currency by major lenders.
The Basel Committee on Banking Supervision, made up of regulators from the world’s major financial centers, proposed a dual approach to capital requirements for crypto assets held by banks in its first rule tailored for the nascent industry.
El Salvador became the first country in the world to adopt bitcoin as legal tender, even though central banks around the world have repeatedly warned that cryptocurrency investors must be prepared to lose all of their money.
Major economies, including China and the United States, have signaled a more stringent approach in recent weeks, while making plans to develop their own central bank digital currencies.
The Switzerland-based Basel committee said in a public consultation document that while banks’ exposures to crypto assets are limited, their continued growth could increase risks to global financial stability if capital requirements are not met. introduced.
Bitcoin and other cryptocurrencies are currently worth around $ 1.6 trillion globally, which is still minimal 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 combined to determine overall capital requirements.
For crypto assets, Basel offers two main groups.
The first includes some traditional tokenized assets and stablecoins that would fall under existing rules and be treated the same as bonds, loans, deposits, stocks or commodities.
This means that the weighting can range from 0% for a symbolic sovereign bond to 1250% or the total value of the asset covered by the capital.
The value of stablecoins and other Group 1 crypto-assets is tied to a traditional asset, such as the dollar in the case of the Diem stablecoin offered by Facebook.
Nonetheless, since crypto assets are based on new and rapidly evolving technology like blockchain, this presents a potentially increased likelihood of operational risks that require an “additional” capital requirement for all types, Basel said.
The second group includes cryptocurrencies like Bitcoin that would be subject to a new “conservative prudential treatment” with a risk weight of 1250% due to their “unique risks”.
Bitcoin and other cryptocurrencies are not tied to any underlying asset.
Under the Basel rules, a risk weight of 1250% means that banks must hold capital at least equal in value to their exposures to Bitcoin or other Group 2 crypto assets.
“The capital will be sufficient to absorb a full write-off of exposures to crypto assets without exposing depositors and other major creditors of banks to a loss,” he added.
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.
Bitcoin’s value swung sharply, reaching a record high of around $ 64,895 in mid-April, before slumping to around $ 36,834 on Thursday.
Banks’ appetite for cryptocurrencies varies, with HSBC saying it has no plans to create a cryptocurrency trading desk because digital coins are too volatile. Goldman Sachs restarted its crypto trading desk in March.
Basel said that given the rapidly changing nature of crypto assets, a further public consultation on capital requirements is likely before the final rules are released.
The central bank’s digital currencies are not included in its proposals.