LONDON (Reuters) – Banks should set aside enough capital to cover losses on any bitcoin assets in full, as global banking regulators suggested Thursday, in a “conservative” move that could prevent large lenders from using the cryptocurrency on a large scale.
The Basel Committee on Banking Supervision, made up of regulators from the world’s leading financial centers, has proposed a dual approach to capital requirements for cryptoassets held by banks in its first individual rule for the emerging sector.
El Salvador became the first country in the world to accept Bitcoin as legal tender, although central banks around the world have repeatedly warned that cryptocurrency investors must be prepared to lose all their money.
Major economies, including China and the United States, have announced a tougher approach in recent weeks, while also making plans to develop digital currencies from their own central banks.
The Basel Committee from Switzerland said in a public consultation document that while banks’ risks to cryptoassets are limited, further growth could increase risks to global financial stability unless capital requirements are introduced.
Bitcoin and other cryptocurrencies are currently worth around $ 1.6 trillion globally, which is still small compared to the bank’s holdings of loans, derivatives and other large assets.
Basel’s rules require banks to assign “risk weights” to different types of assets on their books, summarizing them to determine overall capital requirements.
For cryptoassets, Basel offers two broad groups.
The first includes certain tokenized traditional assets and stablecoins that fall under existing rules and are treated in the same way as bonds, loans, deposits, stocks, or commodities.
This means that the weighting factor can range from 0% for a tokenized sovereign bond to 1250% or the full value of the asset covered by equity.
The value of stablecoins and other group 1 cryptoassets is pegged to traditional assets like the dollar in the case of Facebook’s proposed stablecoin Diem.
However, given that cryptoassets are based on new and rapidly evolving technology such as blockchain, this creates a potentially increased likelihood of operational risks that require additional capital expenditures for all types, Basel said.
The second group includes cryptocurrencies such as bitcoin, which will be subject to a new “conservative prudential approach” with a risk-weighted 1250% due to their “unique risks”.
Bitcoin and other cryptocurrencies are not tied to any underlying asset.
Under Basel rules, a risk weight of 1250% means that banks must have capital at least equal in value to their risks of dealing with bitcoin or other group 2 cryptoassets.
“There will be enough capital to absorb the full write-off of the risks of cryptoassets, without exposing depositors and other senior lenders of banks to losses,” they added.
Few other assets take such a conservative approach under existing Basel rules and include investments in funds or securitizations when banks do not have sufficient information about their underlying risks.
Bitcoin’s value changed dramatically, hitting a record high of $ 64,895 in mid-April before falling to $ 36,834 on Thursday.
Banks’ appetites for cryptocurrencies vary, with HSBC saying it has no plans to create a cryptocurrency marketplace because digital coins are too volatile. Goldman Sachs relaunched its cryptocurrency trading platform in March.
Basel said that given the rapidly evolving nature of cryptoassets, there are likely to be additional public consultations on capital requirements ahead of the publication of the final rules.
Central Bank digital currencies are not included in its offerings.
Basel Crypto Graphics
Hugh Jones reporting; Edited by Rachel Armstrong and Alexander Smith