- Basel Committee proposal puts heavy burden on banks looking to custody cryptocurrencies
- Capital requirements proposal for banks by the Basel Committee legitimizes cryptocurrencies just as El Salvador recognizes Bitcoin as legal tender
“You have to spend money to make money” and when it’s come to banks dealing in Bitcoin, that adage might be more literal than figurative.
As global regulators tighten the noose around Bitcoin, yesterday, the Basel Committee on Banking Supervision (think of it as Eurovision for banks) proposed a 1,250% risk weight be applied to any bank’s exposure to Bitcoin and certain other cryptocurrencies.
In practice, that means that a bank may need to hold a dollar in capital for each dollar worth of Bitcoin (DeFi anyone?), based on an 8% minimum capital requirement.
If enforced, banks holding cryptocurrencies would be akin to the overcollateralized lending pools that are characteristic of decentralized finance.
In the report by the Basel Committee, which includes key central banks like the Federal Reserve and the European Central Bank, the proposal noted,
“The growth of cryptoassets and related services has the potential to raise financial stability concerns and increase risks faced by banks.”
“The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss.”
By implication the Basel Committee contemplates a situation when cryptoassets devalue to zero, which is why the capital requirements for banks holding cryptocurrencies is so high.
The proposal is open to public comment before it takes effect and the Basel Committee has stated that it is likely to change several times as the market evolves.
While no timeline was specified in the report for the proposed rules to take effect, the process for agreeing and implementing Basel rules typically takes years.
Nonetheless, that the Basel Committee would propose banking regulations on cryptocurrency holdings demonstrates just how far cryptocurrencies have come of late.
Although the nascent asset class has more than a decade of history, cryptocurrencies really came to the fore over the past pandemic year, and the Basel Committee proposal, actually legitimizes their existence.
While many banks have been cautious about diving deep into cryptocurrency trading, the surge in retail interest has driven financial firms, including Interactive Brokers and Robinhood Markets to expand access to the market.
Some banks have also been more adventurous than others, with Standard Chartered (+0.04%) announcing last month that it was setting up a joint venture to buy and sell Bitcoin, while State Street (-1.11%), a custodian bank that oversees over US$40 trillion in assets is setting up a new digital division that will help clients trade cryptocurrencies and provide a settlement layer.