Banks must cover risk of bitcoin, warns global bank regulator

The regulator that sets banking rules around the world has thrown the book at cryptocurrencies such as bitcoin.

Digital currencies posed “unique risks”.

The regulator that sets banking rules around the world has thrown the book at cryptocurrencies such as bitcoin, saying that banks must hold more than hundred times as much capital against crypto-denominated assets as against safer ones such as residential mortgages.

The Basel Committee on Banking Supervision said that the digital currencies posed “unique risks” to the banking system and should be treated in a way that ensures banks have enough extra capital to absorb losses in the event that their prices crash to zero.

A “new conservative prudential treatment” was needed for some kinds of crypto, the committee said, specifically naming bitcoin. It cited the “high volatility” of some cryptoassets, adding that the size of the industry was now “meaningful”, characterised by rapid developments and subject to heightened interest by some banks. “Cryptoassets have given rise to a range of concerns including consumer protection, money laundering and terrorist financing and their carbon footprint,” it said.

It has proposed a risk weighting for cryptocurrencies of 1,250 per cent, which would mean that banks have to set aside a dollar of capital for every dollar of crypto exposure. By comparison, the typical risk weighting for home loans is about 10 per cent.

Stablecoins – digital currencies pegged to a traditional currency or asset like the dollar and backed by collateral – and other tokenised traditional assets would continue to be subject to the existing rules. Possible cryptocurrencies issued by central banks are also not included in the proposed crackdown. The Bank of England has said it is looking at issuing its own digital currency, dubbed Britcoin.

While most banks have been cautious about crypto, not least because of concerns about money laundering, others such as Citigroup and State Street have said they are interested in providing crypto services to clients.

Crypto markets took the news in their stride, the price of bitcoin rallying to $US37,000. That was down from a mid-April high of dollars 64,800 but above a low of dollars $US33,500 last weekend.

Police in China arrested 1,100 people this week who were suspected of trading in cryptocurrencies to launder illegal funds. El Salvador, on the other hand, became the first country to make bitcoin legal tender.

The committee, part of the Bank for International Settlements, is the primary standard setter for banks globally. Its members include central banks from the US, EU, Japan and China as well as the Bank of England. It invites responses to its consultation by September 10.

-The Times