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Basel Committee puts bank holdings in Bitcoin and crypto in its highest risk category

June 11, 2021, 3:52 AM UTC

Banks will face the toughest capital requirements for holdings in Bitcoin and other cryptoassets under global regulators’ plans to ward off threats to financial stability from the volatile market.

The Basel Committee on Banking Supervision said on Thursday that the banking industry faces increased risks from cryptoassets because of the potential for money laundering, reputational challenges and wild swings in prices that could lead to defaults.

The panel proposed that a 1,250% risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies. In practice, that means a bank may need to hold a dollar in capital for each dollar worth of Bitcoin, based on an 8% minimum capital requirement. Other assets with this highest-possible risk weighting include securitized products where banks have insufficient information about underlying exposures.

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“The growth of cryptoassets and related services has the potential to raise financial stability concerns and increase risks faced by banks,” the Basel Committee, which includes the Federal Reserve and European Central Bank, said in the report. “The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss.”

Bitcoin gained about 5% to reach $38,226 by 11:43 a.m. in London.

The proposal is open to public comment before it will take effect, and the committee said these initial policies are likely to change several times as the market evolves. No timeline was specified in the report but the process for agreeing and implementing Basel rules worldwide can typically take years.

Some assets, such as tokens with values tied to real-world assets and stablecoins, are set for lower capital requirements.

Crypto has exploded in popularity this year, with day traders and professionals alike hunting for profits in Bitcoin, as well as the more obscure niches of the market. Enthusiasm about institutional adoption, the idea that it’s a store of value akin to “digital gold,” and endorsements from big-name investors like Paul Tudor Jones and Stan Druckenmiller have all fanned the bull market.

Bitcoin jumped from about $10,000 last September to as high as $63,000 in mid-April. However, in the past month, prices have collapsed, falling back to $37,000, on the back of tougher regulatory scrutiny in China and Elon Musk’s criticism of Bitcoin’s high energy cost.

While many banks have been cautious about jumping into crypto trading, the surge in consumer interest is driving financial firms including Interactive Brokers Group Inc. and Robinhood Markets Inc. to expand in the market. Standard Chartered Plc said this month that it’ll set up a joint venture to buy and sell Bitcoin.

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