Banks around the world may soon have to back Bitcoin with traditional capital

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Neither the author, Tim Fries, nor this website, The Tokenist, provides financial advice. Please review our website policy before making any financial decisions.

According to a report on Friday, banks around the world may soon be subject to a new set of rules regarding digital assets. The proposed regulation would divide cryptocurrencies into Group 1, which would include assets such as fiat-based stablecoins, and Group 2, which would contain currencies like Bitcoin.

Banks may soon have to comply with a new set of rules for cryptocurrencies

There are reports that a Swiss-based global forum for industry rule-making called the Basel Committee on Banking Supervision is considering a new set of rules for banks dealing with cryptocurrencies. The proposed rules would divide all digital assets into two groups. Generally speaking, banks dealing with Group 1 cryptocurrencies, primarily currencies backed by other assets such as fiat-backed stablecoins, would not be affected by the new regulations.

The so-called Group 2 would include cryptocurrencies not backed by assets of tangible value. A great example of an asset that would fall into this category is the world’s largest cryptocurrency, Bitcoin. If the Committee reaches an agreement on these rules, any bank wishing to deal with group 2 will have to take additional precautions due to their higher volatility.

One of the caveats is that the bank should hold traditional capital equal in value to the group 2 cryptocurrency. Buying $1 million worth of Bitcoin would mean that a bank needs to raise $1 million in additional capital. The Basel Committee has actively discussed cryptocurrencies. since 2019. In October 2022, he published a report which revealed that banks around the world held approximately $9 billion in digital assets.

Crypto regulation in the wake of LUNA and FTX

While various regulators have been actively pursuing the regulation of digital assets for years, the dramatic events of 2022 have done much to escalate the pressure. In May, LUNA crumbled when UST lost its peg, sending shockwaves through the industry and leading to multiple bankruptcies. With billions lost by retail and institutional investors, perhaps the biggest consequence of the crash is a bill that could prevent the issuance of any algorithmic stablecoins for a period of two years.

More recently, Sam Bankman-Frieds FTX, the world’s second-largest crypto exchange, filed for bankruptcy after halting withdrawals due to a severe liquidity crunch. The chaos surrounding the meltdown only escalated after it was revealed that FTX was violating its own terms of service by loaning out huge sums of user assets seeking credit. ‘Alameda, creating a $10 billion hole in its books.

As the ongoing crypto winter has slowed adoption, the industry has grown big enough for the White House to release its first-ever framework on digital asset regulation in September. On December 8, the SEC issued new reporting guidelines for companies dealing with cryptocurrencies in response to recent disasters in the industry.

Despite the turmoil, institutions have also shown heightened levels of interest in digital assets. JP Morgan has filed with the US Patent and Trademark Office to register its own crypto wallet despite the fact that its CEO has repeatedly deprecated cryptocurrencies and recently likened them to pet stones of company.

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About the Author

Tim Fries is the co-founder of The Tokenist. He has a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior partner on the investment team in the US Private Equity division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and control solutions.

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