A twofold approach to capital requirements for the crypto assets owned by banks in their first customized regulation for a new industry was suggested by the Basel Committee for Banking Supervision, composed of regulators from the world's top financial centers.
Although central banks internationally have cautioned repeatedly that cryptocurrency investors must be ready to lose their whole money, El Salvador is the world's first government in accepting Bitcoin as legal cash.
In a consultation paper, the Swiss-based Basel Committee stated that although there is little exposure of banks to crypto-assets, their continuing growth could increase the risk of global financial stability from fraud, cyber attacks, money laundering, and terrorist finance if the requirements for capital are not met.
Bitcoin and other cryptocurrencies are valued at around $1.6 trillion worldwide, which remains low compared to bank holdings in lending, derivatives, and other important assets.
Basel offers two major groupings for crypto assets.
The first comprises certain traditional assets and steel coins to be handled in the same manner as bonds, loans, deposits, shares, or commodities as they would under present procedures.
This indicates that a tokenized government bond might vary between 0% and 1.250% or the whole value of capital-covered assets.
Nonetheless, because crypto assets are based on new and fast-growing technology like blockchain, they may raise the chance of operational hazards, necessitating an "add-on" capital charge for all types, according to Basel.
Bitcoin and other cryptocurrencies have no connection to any real-world asset.
A risk weight of 1,250 percent means that banks must keep capital that is at least equivalent to the value of their bitcoin or other group 2 crypto asset exposures, according to Basel guidelines.
“The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss,” it added.
A worldwide regulatory framework for cryptoassets, according to Joseph Edwards, head of research at crypto brokerage Enigma Securities, is good given that European banks are split on their engagement in the industry.
“If something is to be treated as an universal asset, it effectively needs to meet quorum with regards to how many parties will handle it. This should move the needle somewhat on that,” Edwards said.
Investments in funds or securitizations when banks lack sufficient information about their underlying exposures are among the few assets that receive such cautious treatment under Basel's present guidelines.
Bitcoin's value has fluctuated wildly, reaching a high of around $64,895 in mid-April before plummeting to around $36,834 on Thursday.
The appetite for cryptocurrencies among banks varies, with HSBC stating that it has no plans to open a cryptocurrency trading desk due to the volatility of the digital coin. In March, Goldman Sachs reopened its crypto trading department.
Digital currencies issued by central banks are not included in the plans.