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The exchange rates and logos of Bitcoin (BTH), Ether (ETH), Litecoin (LTC) and Monero (XMR) are visible on the screen of a cryptocurrency ATM of blockchain payment service provider Bity at the House of Satoshi bitcoin and blockchain shop in Zurich, Switzerland on March 4, 2021.
The Basel Committee on Banking Supervision has weighed on cryptocurrencies. New punitive proposals from the standards body may ensure that bitcoin remains on the fringes of regulated finance. Yet safer areas of the blockchain and crypto world are still accessible to JPMorgan (JPM.N), HSBC (HSBA.L) and others. It’s a good balance between prudence and progress.
The Swiss-based team of banking supervisors, chaired by Spanish rate fixer Pablo Hernndez de Cos, designs international standards that local supervisors implement. The Thursday consultation paper deals harshly with large-scale assets like bitcoin and ethereum.
The two most popular cryptocurrencies fall under the Group 2 designation of the Basel committees, which is reserved for assets that fluctuate greatly in value or whose primary participants may be untraceable and unregulated. This means that a trading position or a loan denominated in bitcoin would be subject to a risk weight of 1250%. So, an asset of $ 100 million would show up as $ 1.25 billion on the bank’s balance sheet, forcing a lender with an 8% capital ratio to hold $ 100 million in corresponding equity.
Such harsh treatment will make it unprofitable for the big banks to facilitate bitcoin transactions in the way they manage bonds or currencies. Lending to clients who wish to buy or short sell the asset would be subject to similar penalties. Hedge funds, businesses and other crypto-curious counterparties will have to stick with industry specialists such as $ 47 billion Coinbase Global (COIN.O).
Proposals go more easily to more monotonous areas of cryptography. The Basels Group 1 designation covers tokenized assets, such as a conventional bond whose ownership is registered in a decentralized ledger. As long as the underlying risks and property rights are the same, standard setters see no reason to massively increase capital requirements. The treatment of stablecoins, or cryptocurrencies whose value is tied to a more stable asset like the U.S. dollar, depends on the strength of the underlying claims.
This gives lenders permission to experiment with the underlying innovations of crypto without piling into volatile bitcoins. Bankers may be worried about missing out, but the industry is still young. The combined value of the 10 largest cryptocurrencies is $ 1.3 trillion, according to CoinMarketCap. JPMorgans’ record alone is about three times greater. Supervisors wisely ensure that cryptocurrencies remain largely outside the regulated banking system, at least in their current form.
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NEWS CONTEXT
– Banks should set aside enough capital to fully cover losses on all bitcoin holdings, proposed global regulators from the Basel Committee on Banking Supervision on June 10.
– The Switzerland-based body, which sets international standards that are then implemented by local watchdogs, has advocated a dual approach to capital requirements for crypto assets.
– The first part covers so-called tokenized assets, where the ownership of traditional securities such as bonds is recorded via a network of computers distributed or secured by cryptography and other similar techniques.
– These assets could be subject to a capital requirement similar to that of the underlying financial products, with additions to take into account the risk of unforeseen technological problems.
– The second group includes cryptocurrencies like bitcoin, which would be subject to a new “conservative prudential treatment” with a risk weight of 1250% for the purpose of calculating capital requirements due to their “unique risks” .
– The consultation ends on September 10.
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