Basel Committee's Crypto Rules Push Banks Away

The Basel Committee on Banking Supervision received a letter from nine banking industry associations lamenting the capital requirements for banks looking to hold crypto make it inconvenient to operate in the space.

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What Happened: In the letter sent earlier this week, industry groups argued the Basel Committee's prudential framework created "material impediments to regulated bank participation in cryptoasset markets.” The groups that signed the letter included derivatives associations ISDA and FIA, the Institute of International Finance, European markets body AFME and the Chamber of Digital Commerce.

The letter referred to the Basel Committee's consultation paper which assigned a 1,250% risk weight to Bitcoin BTC/USD — imposing upon banks to hold a dollar in capital for each dollar of exposure to the coin. In the letter, the groups argued: “certain elements of the proposal make bank involvement in the cryptoasset market cost-prohibitive from a capital perspective."

The banking industry associations highlighted such a limit "is especially concerning given the rapid growth of cryptoasset-related market activity with participants that fall outside the perimeter of prudential and market regulations.” In other words, they suggested such rules would keep the crypto space in an unregulated state by impeding their integration in traditional banking.

The banking associations behind the letter argued the risk profile should take into account the existence of a liquid, two-way market for some crypto assets instead of the “application of a single, undifferentiated 1,250% risk weight." Despite that, the parties agreed with the regulator there is a need for regulatory certainty.

The letter also pointed out current bank exposure to crypto is limited but highlighted it being limited is “neither desirable nor sustainable." The reasons are distributed ledger technology may bring significant benefits to finance and there is significant demand for crypto products and services.

The letter argued the benefits of the crypto industry will mostly realize themselves when regulated banks "are able to play a meaningful role" in this space. The banking groups suggested the Basel Committee should work on its existing international prudential framework, known as Basel III, to implement a framework that is product agnostic.

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Image by Schäferle from Pixabay