According to industry organisations, proposed rules would render “bank involvement in the cryptoasset market cost-prohibitive from a capital perspective,” according to a report to regulators.
An open letter to the Basel Committee on Banking Supervision (BCBS) has been sent by nine banking industry organisations in reaction to the BCBS’s plan to impose strict capital requirements on banks that wish to hold cryptocurrency assets on their books.
According to a consultation paper published by the BCBS in June of this year, Bitcoin carries a risk weight of 1,250 percent, which means that banks would be required to retain one dollar in capital for every one dollar in Bitcoin exposure.
Industry groups, including the derivatives associations ISDA and FIA, the Institute of International Finance, the European markets organization AFME, and the Chamber of Digital Commerce, wrote to the BCBS this week.
This writing was to express their concern that the prudential framework proposed by the BCBS would create “material impediments to regulated bank participation in cryptoasset markets.”
Specifically, they asserted that “certain elements of the proposal make bank involvement in the cryptoasset market cost-prohibitive from a capital perspective,” and that “this approach is particularly concerning given the rapid growth of cryptoasset-related market activity with participants who fall outside the perimeter of prudential and market regulations.”
The associates have urged for a more comprehensive taxonomy of diverse crypto assets and their varying risk profiles in order to improve upon the BCBS’ suggestion.
To replace the simplistic “application of a single, undifferentiated 1250 percent risk weight,” the letter provides a lengthy appendix that details why it is important to take into consideration factors such as the presence of a liquid, two-way market for specific crypto assets.
But despite the fact that they had multiple disagreements with the BCBS’ suggestions in their letter, they nonetheless emphasized the need for regulatory certainty “in the near to medium term, particularly given the pace of evolution and demand for cryptoassets.”
For the time being, the letter observed that banks’ exposure to cryptocurrency remains restricted, but it went on to say that the industry considers this limited exposure to be “neither desirable nor sustainable” for a variety of reasons.
Among these are the potential benefits that distributed ledger technology has for the financial services sector, as well as the present, large demand for crypto-related products and services from clients.
Distributed ledger technology has the ability to provide these benefits. The letter further suggested that the following are the advantages of crypto assets and their underlying technology:
“Will be realized most widely and transparently when regulated banks […] are able to play a meaningful role. In particular, the public and the regulatory community would benefit from bank involvement in the cryptoasset space because of this long history of identifying, monitoring and managing risks from both a prudential and conduct perspective on an ongoing basis.”
Based on the letter’s recommendations, the BCBS should be able to make greater use of the current international prudential framework — such as Basel III — in order to achieve its objectives and to adopt a framework that is not product specific.