Global Banking Regulator Calls for Tighter Capital Rules for Encryption

Global Banking Regulator Calls for Tighter Capital Rules for Encryption

That would mean banks would in effect have to hold capital equal to the exposure they face. A $100 exposure in bitcoin would result in a minimum capital requirement of $100, Basel said. All other crypto assets, including bitcoin and ethereum, would go into the new more strenuous regime. The Basel committee proposed a risk weight of 1,250 per cent, in line with the toughest standards for banks’ exposures on riskier assets. The standards would apply to assets created for decentralised finance (DeFi) and non-fungible tokens (NFTs), but potential central bank digital currencies were outside the scope of the consultation, it added.

Some assets, such as stock tokens, would fit into modified existing rules on minimum capital standards for banks. Others, such as bitcoin, would face a new “conservative” prudential regime, it recommended. Among the risks it cited included market and credit risk, fraud, hacking, money laundering and terrorist financing risk.

Stablecoins, cryptocurrencies pegged to traditional assets such as currencies, would also qualify for existing rules if they were fully reserved at all times, the committee said. Banks would have to monitor that this was “effective at all times”, it added. In a report released on Thursday, the Basel committee acknowledged that while banks’ exposure to the nascent crypto industry was limited, “the growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks”.

Digital tokens that are based on traditional assets, such as shares, bonds, commodities and cash, would fit into the first category for crypto assets.However, they would have to have the same level of legal rights as the traditional asset, such as the right to a dividend or other cash flows some do not currently carry. The consultation ends in September. Prudential rules set requirements on liquid assets and capital levels that a bank must set aside so it can wind down in an orderly way, without harming its customers or creating panic in the market.

State Street and Citigroup are among the banks that have indicated they are looking to provide more crypto services to customers. The Basel proposals come as global regulators grapple with the rapid emergence of digital assets and mushrooming interest from investors. US authorities also want to take a more active role in supervising the $1.5tn cryptocurrency market because of concerns that a lack of oversight risks harming investors in the highly volatile and speculative industry.

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