BCBS defines rules for banks that want to offer crypto assets

A new position paper by the Basel Banking Committee recommends a strict set of rules for financial institutions considering a crypto commitment.

The crypto adoption is also finding its way more and more into the banking sector. Long-established financial institutions seem to be increasingly interested in the new digital assets. For example, BNY Mellon, the oldest bank in the United States, made headlines in February when rumors about possible Bitcoin services made the rounds. Similar speculation also circulated around UBS, Morgan Stanley, Goldman Sachs and Citibank. However, since the May crash, the banking sector has been silent when it comes to crypto exposure.

This commitment, if it is rekindled, could cost the banks dearly, however. At least if the Basel Banking Committee (BCBS) has its way. The committee based at the Bank for International Settlements defined a strict set of rules in a position paper. The document is based on a draft from 2019. In the updated version, the committee calls for strict capital requirements for banks that want to offer their customers services related to Bitcoin and Co. The committee classifies crypto assets into two groups: tokenized stocks and stablecoins on the one hand, bitcoin and other cryptocurrencies on the other.

The committee considers the latter category to be particularly risky due to its high volatility. Accordingly, a risk weight of 1,250 percent should apply to some crypto investments, comparable to the riskiest asset classes. Banks that want to offer these assets would, for example, have to hold another US dollar in reserve for every US dollar invested in Bitcoin. In an example, the bank does the math:

That is, an exposure of $ 100 would result in a risk-weighted asset of $ 1,250. Multiplied by the minimum capital requirement of 8 percent, this would result in a minimum capital requirement of an additional $ 100.

Basel Banking Committee in the position paper

Crypto rulebook sets “minimum” for regulators

The committee also noted in the introduction to the consultation paper that the proposals would represent a “minimum”, which opens the door to even stricter requirements at the discretion of the banks themselves. The letter says more precisely:

Any supervisory treatment of crypto assets determined by the committee would represent a minimum standard for internationally active banks. Jurisdictions are free to apply additional and / or more conservative measures if justified. Countries that prohibit their banks from any exposure to crypto assets would be considered compliant with the global regulatory standard.

Basel Banking Committee in the position paper

The Basel Banking Committee has been issuing regulatory recommendations for supervisory authorities around the world since its inception. The proposals are not legally binding. In general, however, it is assumed that the recommendations will be adopted, as the guidelines are developed in discussions with banks and supervisory authorities. The decisive question is to what extent regulations are adopted or even tightened.

Should supervisory authorities follow the recommendation, this would give the banks an initial scope for any crypto engagement. The price that the financial institutions would have to pay for this, however, would be high. The recommendation also comes at a time when the regulatory thumbscrews are being tightened against crypto assets worldwide.

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