Updated 14 Jun, 2021

This is why Basel Committee Plans Strict Banking Regulations on Crypto

 

Basel Committee

Key Takeaways:

  • The Basel committee suggests the toughest rules on banks willing to offer cryptocurrencies
  • The most influential banking regulator splits crypto assets into two groups

Regulatory agencies and governments across the world are calling for the introduction of an overarching cryptocurrency oversight to protect participants in the digital asset market. The latest to raise its concerns among the regulators is the Basel Committee on Banking Supervision.

A report by the Basel committee paints a regulatory framework on cryptos

The Basel committee is considered the most powerful and authoritative banking regulator. According to the Basel committee, the outlook for adoption of the crypto space by mainstream finance, should depend on certain factors. These factors include the level of risk protection, rules and requirements for holding digital assets.

In last week’s report, the committee had capital requirements for banks that accept cryptocurrencies given they will be exposed to their volatile nature. Requirements that take into account the higher risks involved in trading. Moreover, banks who deal with cryptos should carry the toughest bank capital rules of any asset.

“The growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks,” the report says. These risks, as mentioned in the report, include market and credit risk, money laundering, fraud, hacking and terrorist financing risk.

The Basel committee makes a clear distinction between two types of coins, falling into two categories. The first category would group stablecoins, which with “some modifications and additional guidance, would be eligible for treatment under existing rules”. Bitcoin and other volatile digital assets would face a “new conservative prudential treatment,” suggests the report.

The Toughest Rules for Banks with Exposure to Bitcoin and Other Volatile Coins 

In addition, there needs to be mitigation of financial risks for participants in the market. The committee proposes a risk weighting of 1,250% for bitcoin, ether and other volatile tokens. That will require banks that hold these assets to hold additional capital equivalent to the face value of the exposure.

“A $100 exposure would give rise to risk-weighted assets of $1,250. This when multiplied by the minimum capital requirement of 8%, results in a minimum capital requirement of $100.  (That is, the same value of the original exposure, as 12.5 is reciprocal of 0.08),” the proposal said.

The Basel committee is the most recent example of a regulator that aims to intervene into the fast-emerging market. , a growing number of agencies and governments are saying cryptocurrencies need to be subjected to rules and relatively high taxes. Among those agencies is the Securities and Exchange Commission led by Chairman Gary Gensler.