Global banking regulators proposed on Thursday that banks must set aside sufficient capital to fully compensate for any losses in bitcoin holdings. This is a “conservative” step that may prevent major lenders from using cryptocurrencies on a large scale.

The Basel Committee on Banking Supervision, composed of regulators from the world’s major financial centers, proposed a dual approach to the capital requirements of encrypted assets held by banks in its first customized rules for emerging industries.

El Salvador has become the first country in the world to adopt Bitcoin as its legal tender, despite repeated warnings by global central banks that investors in cryptocurrencies must be prepared to lose all their funds. The price of Bitcoin in India is rupee. As of 5 pm Eastern Standard Time on June 10, it had reached 2.77 million.

In recent weeks, major economies, including China and the United States, have indicated that they will take more stringent measures and have also formulated plans to develop their own central bank digital currencies.

The Swiss-based Basel Committee stated in a public consultation document that although banks have limited exposure to crypto assets, if capital requirements are not introduced, their continued growth may increase the risk of global financial stability.

Bitcoin and other cryptocurrencies are currently valued at approximately US$1.6 trillion (approximately Rs 1,1690,220 crore) globally, which is still small compared to loans, derivatives and other major assets held by banks.

Basel’s rules require banks to assign “risk weights” to different types of assets in their and add these weights to determine overall capital requirements.

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For crypto assets, Basel proposes two major categories.

The first includes certain tokenized traditional assets and stablecoins, which will be subject to existing rules and be treated in the same way as bonds, loans, deposits, stocks, or commodities.

This means that the weight may range from 0% of tokenized sovereign bonds to 1,250% of the assets covered by the capital or the entire value.

The value of stablecoins and other group 1 encrypted assets is linked to traditional assets, such as the US dollar in the Diem stablecoin proposed by Facebook.

However, given that encrypted assets are based on fast-developing new technologies such as blockchain, this may increase the possibility of operational risk, requiring “additional” capital expenses for all types, Basel said.

‘Unique risk’

The second group includes cryptocurrencies like Bitcoin. Due to their “unique risks”, they will receive a new “conservative and prudential treatment” with a risk weight of 1,250%.

Bitcoin and other cryptocurrencies are not linked to any underlying assets.

According to the Basel Rules, a risk weight of 1,250% means that the bank must hold at least the capital equal to the value of its exposure in Bitcoin or other group 2 encrypted assets.

It added: “The capital will be sufficient to absorb the full write-off of the crypto asset exposure without causing losses to depositors and other senior creditors of the bank.”

Few other assets receive such conservative treatment under current Basel rules, including investing in funds or securitizations where banks do not have sufficient basic exposure information.

The value of Bitcoin fluctuated sharply, hitting a record high of approximately US$64,895 (approximately 4.74 million rupees) in mid-April, and then fell to approximately US$36,834 (approximately 2.7 million rupees) on Thursday.

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Banks have different appetites for cryptocurrencies. HSBC said that due to the volatility of digital currencies, it has no plans to establish a cryptocurrency trading desk. Goldman Sachs restarted its crypto trading platform in March.

Basel said that given the fast-growing nature of crypto assets, further public consultations on capital requirements may be conducted before the final rule is announced.

The central bank’s digital currency is not included in its proposal.

© Thomson Reuters 2021

Interested in cryptocurrency? We discussed everything about encryption with WazirX CEO Nischal Shetty and Weekend Investing founder Alok Jain on the TechnologyShout podcast Orbital. Orbital can be used on Apple Podcasts, Google Podcasts, Spotify, Amazon Music and wherever you podcasts.