Bitcoin price fluctuates as global banking regulator mulls tougher crypto rules

Cryptocurrencies had another wild night after a tough new move from a powerful international body that could be gamechanging for the market.

The price of cryptocurrencies rose sharply before dipping again overnight after calls for tough new rules on the market by the world’s top international banking supervisory authority.

The Basel Committee on Banking Supervision overnight targeted toughening up the rules on crypto assets, notably for more speculative ones such as bitcoin.

It said it was launching a public consultation on proposals for how the world’s banks could best manage their exposure to crypto assets.

The BCBS, which sets the rules for banks, said crypto assets could increase risks to the banking system.

Its reform proposals concern the capital that banks must set aside to guard against default risks.

The public consultation on preliminary proposals “for the prudential treatment of banks’ crypto asset exposures” runs until September 10, the BCBS said.

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Bitcoin and other cryptocurrencies took a hit overnight.

“While banks’ exposures to crypto assets are currently limited, the continued growth and innovation in crypto assets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment,” the panel said.

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The committee said there has been rapid growth in crypto assets over the past few years, with the estimated market capitalisation of some of those assets recently reaching new all-time highs.

“Crypto assets are defined as private digital assets that depend primarily on cryptography and distributed ledger or similar technology,” according to the consultative document issued Thursday.

The cryptocurrency market took a hit after the news – after a short-lived rise immediately after – with most currencies dropping overnight, according to Coindesk.

Bitcoin took a 1.11 per cent hit, meaning it was valued at $US36,665 ($A47,291) as of 8.30am this morning.

The news is being seen as good and bad for cryptos depending on who you speak to.

“It’s a piece of news that both advocates and critics of bitcoin will declare as a win, Luke Sully, CEO at treasury technology specialist Ledgermatic, told Bloomberg.

“It demonstrates that bitcoin is now a recognised asset class with risk management parameters for the banks, but these same parameters could be a potential deterrent given the onerous capital requirements that may make it an unpalatable business.”

Range of concerns

BCBS said that while the market remained small relative to the size of the global financial system and banks’ exposures to crypto assets are currently limited, the market’s absolute size was meaningful and developing rapidly.

“Crypto assets have given rise to a range of concerns including consumer protection, money laundering and terrorist financing, and their carbon footprint,” the committee said.

“The growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks.”

The committee said certain crypto assets had shown a high degree of volatility, and could present banks with a range risks to their liquidity and credit.

The Basel committee is proposing subdividing crypto assets into two groups. The first would deal with assets that could fall under existing rules, which would be bolstered with modifications and fresh guidance.

These would include “tokenised traditional assets” such as bonds or shares recorded using the new technologies, but also “stablecoins”.

These are backed by a currency, like the Facebook-backed digital payments project Diem will be using US dollars.

The second group encompasses assets such as bitcoin, which do not fulfil the classification conditions.

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The Basel Committee on Banking Supervision overnight targeted toughening up the rules on crypto assets.

“Since these pose additional and higher risks, they would be subject to a new conservative prudential treatment,” the BCBS said.

It proposes sharply tightening the weightings in the calculations used to determine the sums that the banks must set aside to guard against the risks.

Move towards crypto assets

The BCBS has established a series of international standards for bank regulation and has 45 member institutions from 28 jurisdictions.

The committee was set up by central bank governors in 1974 to enhance financial stability by improving the quality of banking supervision worldwide.

It aims to enhance the security and reliability of international banking, through co-operation between supervisory authorities and it issues minimum standards and guidelines.

It is headquartered in the Swiss city of Basel at the Bank for International Settlements – the international financial institution that links central banks.

In recent months, several major banks have stepped into cryptocurrencies after a long spell of reluctance.

El Salvador’s parliament on Wednesday approved a law that should eventually allow bitcoin to be used in many aspects of daily life.

But cryptocurrencies have drawn the wrath of countries like China. On Thursday, more than 1000 people were arrested there in a sweeping crackdown against a network accused of fraudulent activities in connection with cryptocurrencies.