Basel Committee Warms Up to Bitcoin & Crypto With More Flexible Proposal

Source: Adobe/Georg Hummer

 

After receiving criticism from industry players last year for being too conservative, a committee at the Bank for International Settlements (BIS), has proposed a cap on how much exposure traditional banks can have to cryptoassets “where there is no counterparty.”

According to a new consultation report from the BIS’ Basel Committee on Banking Supervision, the exposure limit for banks should be set at 1% of “Tier 1 capital,” meaning the capital held in a bank’s main reserves.

The proposed cap applies to all cryptoassets that are considered unbacked, or that have “no counterparty,” as the BIS puts it. An example of such an asset is bitcoin (BTC), the BIS report said. 

The 1% cap will apply to the total exposure, meaning that a bank that already has 0.5% of its capital in BTC can at most have another 0.5% invested in another unbacked cryptoasset.

The proposed 1% cap is an attempt to bring rules for banks’ exposure to crypto more in line with those that applies to other business areas for banks. For instance, banks are prohibited from having too large of an exposure to any single company in case that company goes out of business.

“The large exposure rules of the Basel Framework are not designed to capture large exposures to an asset type, but to individual counterparties or groups of connected counterparties,” the report said. It added that this implies “for example, no large exposure limits on cryptoasset where there is no counterparty, such as Bitcoin.”

The latest report from the BIS is the second such report the international body produces

In the original report from June last year, the Committee said unbacked cryptoassets poses “additional and higher risks” than backed cryptoassets such as stablecoins and tokenized real assets. 

In practice, originally proposed rules meant banks would have to boost their capital reserves in order to comply, which at the time led the Global Financial Markets Association (GFMA) to call them “overly conservative.”

Under the new proposal, the rules are more flexible for cryptoassets where a derivative such as a futures market or an exchange-traded fund (ETF) exists, which gives banks the ability to hedge their exposure.

For the time being, a relatively liquid and regulated derivatives market exists for both bitcoin and ethereum (ETH) globally.

The Committee is now seeking comments on the proposed rules, with a deadline at the end of September.
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