Global regulators are calling for cryptocurrencies to carry the toughest bank capital rules of any asset, arguing that requirements for holding bitcoin and similar tokens should be far higher than those for conventional stocks and bonds.
Banks with exposure to volatile cryptocurrencies should face stricter capital requirements to reflect the higher risks, said the Basel Committee on Banking Supervision, the world’s most powerful banking standards-setter.
Its intervention came in a report released on Thursday as policymakers around the world step up plans to regulate the fast-emerging market.
The Basel committee acknowledged that while banks’ exposure to the nascent crypto industry was limited, “the growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks”.
Among the risks it cited included market and credit risk, fraud, hacking, money laundering and terrorist financing risk.
Some assets, such as stock tokens, would fit into modified existing rules on minimum capital standards for banks. Others, such as bitcoin, would face a new “conservative” prudential regime, it recommended.
Stablecoins — cryptocurrencies pegged to traditional assets such as currencies — would also qualify for existing rules if they were fully reserved at all times, the committee said. Banks would have to monitor that this was “effective at all times”, it added.
All other crypto assets, including bitcoin and ethereum, would go into the new, more strenuous regime. The Basel committee proposed a risk weight of 1,250 per cent, in line with the toughest standards for banks’ exposures on riskier assets.
That would mean banks would in effect have to hold capital equal to the exposure they face, and be prepared if the value of the asset were worthless. A $100 exposure in bitcoin would result in a minimum capital requirement of $100, Basel said.
The standards would apply to assets created for decentralised finance (DeFi) and non-fungible tokens (NFTs), but potential central bank digital currencies were outside the scope of the consultation, it added.
Bitcoin has risen 3 per cent today, while ethereum was up over 2 per cent.
The Basel proposals come as global regulators grapple with the rapid emergence of digital assets and mushrooming interest from investors. US authorities also want to take a more active role in supervising the $1.5tn cryptocurrency market because of concerns that a lack of oversight risks harming investors in the highly volatile and speculative industry.
Some bankers feel the Basel proposals go too far. “If we are going to impose a punitive weighting, what we are saying is we don’t want these assets in the banking system,” said a banking executive involved in the crypto space.
“We’ve all seen what happens when you drive activity out of a pretty well regulated system into the wild west . . . Do the regulators want the adults to do the business, or would they want the teenagers to do the business?”
State Street and Citigroup are among the banks that have indicated they are aiming to provide more crypto services to customers. Last week, UK-headquartered Standard Chartered announced a joint venture with BC Group, the Hong Kong-listed digital asset company, to establish a digital asset brokerage and exchange platform for clients across Europe.
Prudential rules set requirements on liquid assets and capital levels that a bank must set aside so it can wind down in an orderly way, without harming its customers or creating panic in the market.
Digital tokens that are based on traditional assets, such as shares, bonds, commodities and cash, would fit into the first category for crypto assets.
However, they would have to have the same level of legal rights as the traditional asset, such as the right to a dividend or other cash flows some do not currently carry.
The consultation ends in September.