Basel Banking Committee Sets High Standards for Crypto

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In Brief
  • According to the Basel Committee on Banking Supervision, cryptocurrencies should have some of the strictest capital requirements due to their risks.

  • These stricter requirements would apply to pure cryptocurrencies, but not necessarily stock tokens or stablecoins.

  • Markets reacted to this appraisal by pushing Bitcoin up 5%.

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According to the Basel Committee on Banking Supervision, cryptocurrencies should have some of the strictest capital requirements, due to their risks.

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Although banks’ face limited exposure to the nascent crypto industry, “the growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks”. These risks include market and credit risk, fraud, hacking, money laundering and terrorist financing risk.

As a consequence, requirements for holding bitcoin and similar tokens should be higher than those for conventional stocks and bonds, according to a consultation paper released by the Basel Committee.

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One of the world’s most powerful banking standards-setter, the Basel Committee includes the Federal Reserve and the European Central Bank.

Details of the consultation

The Basel Committee proposed a risk weight of 1,250%, among the toughest standards for banks’ exposures on riskier assets. In effect, banks would have to hold capital equal to the exposure they face. For instance, A $100 exposure in bitcoin would require a minimum capital backing of $100.

These standards would apply to assets created through decentralized finance (DeFi) and non-fungible tokens (NFTs). However, the Basel Committee said that central bank digital currencies were outside the scope of the consultation.

However, the Basel Committee had a different perspective about other specific crypto assets, which it defined as “private digital assets that depend primarily on cryptography and distributed ledger or similar technology”. For example, stock tokens could fit into modified existing rules 

on minimum capital standards for banks. Additionally, stablecoins would also qualify for existing rules provided they were fully reserved at all times. 

Bitcoin boosted by the news

Despite the somewhat harsh appraisal by the Basel Committee, investors seem to have rather gleaned their relative acceptance of cryptocurrencies. The consultation demonstrates that regulators are taking the market seriously and preparing the banking industry for widespread adoption.

Bitcoin jumped roughly $2,000 dollars with the publishing of the paper earlier this morning.

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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