Bank authorities plot Bitcoin's strictest capital regulation

Digital currencies issued by central banks are not included in the plans.
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A banner is seen at a beach cafe on Punta Roca Beach in La Libertad

The banks must allocate adequate capital for all Bitcoin assets to be covered in a "conservative" way by global regulators on Thursday that might prohibit large lenders from making widespread use of cryptocurrency.

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 recent weeks, major economies such as China and the US have shown a harder attitude while establishing plans to build their digital currencies for their own central banks.

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.

In order to estimate the total requirements of capital, the Basel standards require banking to assign "risk weights" to various types of assets on their books.

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.

Stablecoins and other group 1 crypto-assets have their value connected to a traditional asset, such as the dollar in the case of Facebook's planned Diem stablecoin.

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.

‘UNIQUE RISKS’

Because of their "unique risks," cryptocurrencies such as bitcoin would be subject to a new "conservative prudential treatment" with a risk-weighting of 1,250 percent.

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.

Bitcoin was up 1.5 percent at $37,962 at 1053 GMT after Basel's statement.

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.

Given the fast developing nature of crypto assets, Basel expects the second round of public input on capital needs before final guidelines are released.

Digital currencies issued by central banks are not included in the plans.