Basel’s draft rules make cryptocurrencies too expensive for banks to trade

Nine banking industry associations have submitted letters to the Basel Committee on Banking Supervision (BCBS) in response to their proposal to introduce strict capital requirements for banks wishing to keep crypto assets on their books.

In June of this year, BCBS published an advisory paper that assigned Bitcoin (BTC) a risk weight of 1.250%, which means banks would have to hold $ 1 of capital for every $ 1 they need to invest in Bitcoin.

In their letter this week, industry groups – including the derivatives associations ISDA and FIA, the Institute of International Finance, the European market organization AFME and the Chamber of Digital Commerce – argue that the framework BCBS expected caution will create “physical barriers” for regulated banks to enter the cryptocurrency market. “

They argued that “certain elements of the proposal make banks’ participation in the cryptocurrency market unaffordable from a capital perspective,” adding, “This approach specifically concerns the rapid growth of crypto-related market activity with non-market participants and security.” Regulations. “

In order to improve the BCBS proposal, the employees discussed a more differentiated classification of various crypto assets and their different risk profiles. Instead of “applying a single undifferentiated risk weight of 1250%”, the letter contains a detailed addendum which ensures that aspects such as the existence of a reciprocal market, liquidity, etc. for some crypto-assets are taken into account.

Despite many differences of opinion with the BCBS proposal, the associations emphasized the need for regulatory security “in the short and medium term, especially in view of the pace of development and customer demand for cryptocurrencies“. The letter also notes that banks’ exposure to cryptocurrencies is currently limited, but stresses that the industry sees this level of restrictions as “undesirable and sustainable” for some reason.

Related: Bitcoin is in the highest risk category in the new Basel banking capital regulation

These reasons include the potential benefits that distributed ledger technology brings to the financial services sector and the significant existing demand for crypto-related products and services from customers. Additionally, the letter argues that the benefits of crypto assets and their underlying technology:

“Is implemented most comprehensively and transparently when banks regulate […] can play a significant role. The public and regulators in particular will benefit from the bank’s involvement in the crypto space, as it has long identified, monitored, and managed risks from both oversight and behavior. “

The letter suggested that BCBS could use more than one existing international security framework such as Basel III to achieve its goals and implement a product-free framework.