After another turbulent week in the crypto world, the Basel Committee steps up to regulate cryptoassets - basically very good news ...

After another turbulent week in which state officials or regulators send the crypto market downhill (the FBI hacks into a criminal's wallet and seizes bitcoins extorted through ransomware) or uphill (more calls to legalize Bitcoin and Co. follow from various Latin American states after El Salvador's Bukele wants to elevate BTC legal tender), the Basel Committee of the #BIS (Bank for international Settlement) steps up to formulate capital requirements towards #banks for #cryptoassets. That is good news for the crypto market, even if it may not seem so at first.

The #BaselCommittee on #Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks to enhance financial stability with 45 members (central banks and bank supervisors) from 28 jurisdictions. It is hence, probably the most relevant regulator of the finance sector.

In its press release last Thursday, June 10, issues public consultation on preliminary proposals for the prudential treatment of banks' cryptoasset exposures.

The proposals split cryptoassets into two broad groups:

  • those in group 1 eligible for treatment under the existing Basel Framework with some modifications, i.e. particularly #stablecoins and tokenized (traditional) assets ...
  • ... and others in group 2, such as bitcoin, are subject to a new conservative prudential treatment, in fact puts Bitcoin and other #cryptocurrencies in the highest risk category in terms of bank capital exposure (1'250% risk weight proposed to be applied to bank's exposure to Bitcoin & Co.) and in practice, means that banks may need to hold a dollar in capital for each dollar worth of Bitcoin holdings - based on the 8% minimum capital requirement

Why is that a positive signal to the cryptoworld (at least mid- to long-term)?

  1. The banking sector, which is possibly the most heavily regulated sector of the economy, will thus receive an initial indication, hence clarity from the Basel Committee on the capital adequacy requirements for cryptoassets. Demand for crypto offerings from banks is growing worldwide, from customer and investor-side.
  2. The Basel Committee sets global minimum standards for capital adequacy. On the one hand, the proposal promotes a harmonization of the taxonomy at the international level. On the other hand, it also draws a differentiation between the stablecoins and asset-backed tokens here and the payment tokens, currently (still) subject to very high volatility, above all Bitcoin, there.
  3. Although the backing requirements (1,250% risk weight proposed) for cryptocurrencies seem almost prohibitively high, they are assigned to the highest risk category, indeed, but not excluded per se. This is a start, admittedly a conservative one.
  4. The Basel Committee submitted a proposal for consultation. The proposed requirements are hence subject to discussion and change and could ultimately still be set at lower levels, as the industry might have deviating arguments. As the cryptomarket is still in its infancy and will mature swiftly and alongside further clarity expected also from other regulators worldwide, volatility and speculation will shrink and (too) harsh capital requirements also for cryptocurrencies might no longer be proportionate.

Exiting Times, more to come, stay tuned ...


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