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Bank regulators plan 'conservative' capital rule for bitcoin

Thu, 10th Jun 2021 11:00

By Huw Jones

LONDON, June 10 (Reuters) - Banks must set aside enough
capital to cover losses on any bitcoin holdings in full, global
banking regulators proposed on Thursday, in a "conservative"
step that could prevent widescale use of the cryptocurrency by
major lenders.

The Basel Committee on Banking Supervision, made up of
regulators from the world's leading financial centres, proposed
a twin approach to capital requirements for cryptoassets held by
banks in its first bespoke rule for the nascent sector.

El Salvador has become the world's first country to adopt
bitcoin as legal tender even though 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
signalled in recent weeks a tougher approach, while developing
plans to develop their own central bank digital currencies.

The Swiss-based Basel committee said in a public
consultation paper that while bank exposures to cryptoassets are
limited, their continued growth could increase risks to global
financial stability if capital requirements are not introduced.

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

Basel's rules require banks to assign "risk weightings" to
different types of assets on their books, with these totted up
to determine overall capital requirements.

For cryptoassets, Basel is proposing two broad groups.

The first includes certain tokenised traditional assets and
stablecoins which would come under existing rules and treated in
the same way as bonds, loans, deposits, equities or commodities.

This means the weighting could range between 0% for a
tokenised sovereign bond to 1,250% or full value of asset
covered by capital.

The value of stablecoins and other group 1 crypto-assets are
tied to a traditional asset, such as the dollar in the case of
Facebook's proposed Diem stablecoin.

Nevertheless, given cryptoassets are based on new and
rapidly evolving technology like blockchain, this poses a
potentially increased likelihood of operational risks which need
an "add-on" capital charge for all types, Basel said.

'UNIQUE RISKS'

The second group includes cryptocurrencies like bitcoin that
would be subject to a new "conservative prudential treatment"
with a risk-weighting of 1,250% because of their "unique risks".

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

Under Basel rules, a 1,250% risk weight translates into
banks having to hold capital at least equal in value to their
exposures to bitcoin or other group 2 cryptoassets.

"The capital will be sufficient to absorb a full write-off
of the cryptoasset exposures without exposing depositors and
other senior creditors of the banks to a loss," it added.

Few other assets that have such conservative treatment under
Basel's existing rules, and include investments in funds or
securitisations where banks do not have sufficient information
about their underlying exposures.

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

Banks' appetite for cryptocurrencies varies, with HSBC
saying it has no plans for a cryptocurrency trading
desk because the digital coins are too volatile. Goldman Sachs
restarted its crypto trading desk in March.

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

Central bank digital currencies are not included in its
proposals.

(Reporting by Huw Jones
Editing by Rachel Armstrong and Alexander Smith)

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