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Lately, the Basel Committee on Banking Supervision proposed capital requirements for banks’ cryptoassets holdings. The committee believes that banks must set aside adequate capital to ensure their financial stability in the event of losses incurred on digital currency assets. The proposals also set apart stablecoins that are pegged to fiat currency from digital currencies like bitcoin, which the committee believes carry ‘unique risks’.
Large banks offering cryptoassets to clients
The public consultation paper comes against a backdrop where many large banks in the US have either started or are planning to offer crypto funds to their clients.
It all started with the Office of the Comptroller of the Currency’s letter in July 2020 stating national banks were allowed to provide crypto custody services.
In March 2021, Morgan Stanley became the first major bank to allow exposure to bitcoin funds to its wealthier clients who have at least US$2 million in assets. Goldman Sachs followed suit, and its wealth management division’s newly appointed head said that a full spectrum of investments in cryptoassets would be offered to clients. JPMorgan and Wells Fargo, too, have similar plans.
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About two months later, crypto custody firm NYDIG confirmed it is in advanced talks with hundreds of US banks to enable them to offer bitcoin exposure services to their clients.
Banks are reportedly wary of customers parking their funds at exchanges like Coinbase and Kraken to buy cryptoassets. Through this, clients can send dollars to the bank who can deposit in crypto exchanges.
While Morgan Stanley and other big US banks will limit crypto exposure offerings to only their wealthier clients, NYDIG can bring these services to the doorstep of small deposit holders.
Basel norms infuse stability in banking system
Capital adequacy, stress testing and liquidity are the essential pillars of banking. To strengthen these after the financial crisis of 2007-08, the Basel Committee came up with Basel III framework. Although these regulatory norms cannot be legally enforced on banks, they are widely adopted to reinforce confidence in the country’s banking system. Banks must have enough capital to cover any losses on exposures to loans and other assets. Basel norms also set minimum Tier 1 capital requirement. The regulatory framework upholds the interests of the primary stakeholder in banking services, the depositor.
With the latest developments in the banking space and increased exposure to volatile cryptoassets, the Swiss-based panel has spurred into action.
Recently, major economies like the US and China have signaled the adoption of stricter measures for cryptocurrencies. Many central banks plan to launch their digital currencies.
Bitcoin, the world’s largest digital currency, has lost nearly 50 per cent value since April this year, and other cryptoassets have also demonstrated volatile nature. Banks in the US and elsewhere are jumping onto the crypto bandwagon, but it can be fraught with risks.
The latest Basel proposals on capital requirements to cover these risks seem like a move in the right direction. Banks can assign a risk-weighting of 1,250 per cent to bitcoin and other cryptoassets. Such a scenario will compel lenders and investment banks to set aside capital equivalent to the value of crypto exposures and protect depositors and other stakeholders from losses in the event of any damage to banks’ crypto holdings.
The banking sector is also divided on cryptoassets exposure, with major banks like HSBC opposing it.
For now, Basel Committee’s proposal addresses at least some concerns and upholds the interests of depositors.
