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Bank regulators are planning toughest capital rule for bitcoin

Banks must set aside sufficient capital to cover losses on all bitcoin holdings in full, global regulators proposed Thursday, in a “conservative” step that could prevent widespread use of cryptocurrency by large lenders.

The Basel Committee on Banking Supervision, made up of supervisors from the world̵

7;s leading financial centers, proposed a dual approach to capital requirements for cryptocurrencies that banks had in its first tailor-made rule for the emerging sector.

El Salvador has become the world’s first country to adopt bitcoin as a legal tender, although central banks globally have repeatedly warned that investors in the cryptocurrency must be ready to lose all their money.

Major economies, including China and the United States, have signaled a stricter approach in recent weeks as they develop plans to develop their own digital central bank currencies.

The Swiss-based Basel Committee said in a consultation paper that while bank exposures to cryptocurrencies are limited, their continued growth could increase the risk of global financial stability from fraud, cyber attacks, money laundering and terrorist financing if capital requirements are not introduced.

Bitcoin and other cryptocurrencies are currently worth about $ 1.6 trillion globally, which is still small compared to bank holdings of loans, derivatives and other major assets.

Basel’s rules require banks to assign “risk weights” to different types of assets in their books, with these pooled to determine total capital requirements.

For cryptoassets, Basel proposes two broad groups.

The first includes certain tokenized traditional assets and stack coins, which will be subject to existing rules and treated in the same way as bonds, loans, deposits, stocks or commodities.

This means that the weighting can vary between 0% for a tokenized government bond to 1,250% or the full value of assets covered by capital.

The value of stablecoins and other Group 1 cryptocurrencies is tied to a traditional asset, such as the dollar in the case of Facebook’s proposed Diem stablecoin.

Nevertheless, given cryptoassets based on new and rapidly evolving technology such as blockchain, this poses a potentially increased likelihood of operational risks needing an “add-on” capital charge for all types, Basel said.


The second group includes cryptocurrencies such as bitcoin, which will be subject to a new “conservative prudential treatment” with a risk weight of 1,250% due to their “unique risks”.

Bitcoin and other cryptocurrencies are not linked to any underlying asset.

Under the Basel rules, a risk weight of 1,250% corresponds to banks having capital at least equal in value to their exposures to bitcoin or other Group 2 cryptocurrencies.

“The capital will be sufficient to absorb a full depreciation of the crypto asset exposures without subjecting depositors and other senior creditors in the banks to a loss,” it added.

Joseph Edwards, head of research at cryptocurrency brokerage Enigma Securities, said a global regulatory framework for cryptocurrencies is a positive given that banks in Europe are divided over involvement in the sector.

“If something is to be treated as a universal asset, it must meet effectively decisively as to how many parties will deal with it. This should move the needle somewhat on it,” Edwards said.

Bitcoin gained after Basel’s announcement and traded 1.5% up to $ 37,962 at 1053 GMT.

Few other assets are treated so conservatively under Basel’s existing rules and include investments in funds or securitizations where banks do not have sufficient information on their underlying exposures.

The value of bitcoin has fluctuated wildly, hitting a record high of around $ 64,895 in mid-April before falling to around $ 36,834 on Thursday.

Banks’ appetite for cryptocurrencies varies, with HSBC (HSBA.L) saying they have no plans for a cryptocurrency trade because digital currencies are too volatile. Goldman Sachs (GS.N) restarted its crypto trading desk in March. Read more

Basel said that given the rapidly evolving nature of the cryptocurrency, a further public consultation on capital requirements is likely before the final rules are announced.

The central bank’s digital currencies are not included in its proposal.

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