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Bitcoin should carry toughest capital requirements for banks, given risks from volatility, global watchdog says
Markets Insider | Sophie Kiderlin | Jun 10, 2021
- Bitcoin poses higher risks than stablecoins, so tougher capital set-aside is needed to safeguard banks, BIS said.
- Banks will need to hold $1 in capital for every $1 worth of bitcoin given the threat to stability from its volatility.
- But stablecoins should carry a lower risk weighting as given to stocks, BIS said.
Bitcoin should carry the tightest capital requirements for banks due to its high levels of volatility, while lower-risk stablecoins should be assessed like stocks, the Bank of International Settlements said in a report on Thursday .
The Basel Committee on Banking Supervision, which is the most powerful group of central bank representatives when it comes to setting banking standards, said banks should have to hold $1 in capital for every $1 worth of bitcoin they hold.
See: El Salvador approves Bitcoin as legal tender – the first country to do so
This is due to the volatile nature of bitcoin and similar cryptocurrencies that prevent them from fulfilling certain conditions, for example relating to credit and market risk, laid out under the Basel Framework. The Basel Framework is commonly recognized as the gold standard for banking regulation and asset risk classification. Bitcoin and other similar cryptocurrencies, as well as decentralized finance products and non-fungible tokens, are seen as a very high-risk and were therefore should fall under the tightest possible restrictions.
"Certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increase, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering / terrorist financing risk; and legal and reputation risks," the report said.
However, not all crypto assets are as difficult - stock tokens, for example, comply with the Basel Framework and are therefore subject to looser rules, which are similar to stocks and stablecoins were also assessed as less risky than cryptocurrencies. This is because they are tied to fiat currencies, like the US dollar, which protects them from severe volatility. The effectiveness of these 'stabilization mechanisms' would however have to be continuously assessed.
"While the cryptoasset market remains small relative to the size of the global financial system, and banks' exposures to cryptoassets are currently limited, its absolute size is meaningful."
See: An Analysis of Bitcoin’s Use in Illicit Finance
BIS explained the importance of the new regulations, adding that the fast development of the investment sector also played a role.
The committee also made specific reference to consumer protection, money laundering, terrorist financing and the environmental impact of crypto assets in their report, saying that these factors meant crypto needed to be more tightly regulated. BIS thereby echoed the concerns many regulators around the world have shared.
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