Global banking regulators have classified Bitcoin as the riskiest of investments, bringing cryptocurrencies even closer to the mainstream. However, they increased the cost of holding digital assets on a bank’s balance sheet, potentially delaying crypto’s wider adoption.
The Basel Committee on Banking Supervision proposed on Thursday (June 10) that a bank’s exposure to Bitcoin and other cryptocurrencies be given a 1,250 percent risk weight. After the announcement, Bitcoin soared approximately 5% before reversing its gains.
Mr Luke Sully, CEO of Ledgermatic, a treasury technology company, said: “It’s a piece of news that both Bitcoin supporters and detractors will hail as a victory. It shows that Bitcoin is now a recognised asset class with risk management parameters for banks, but these same standards could be a disincentive given the onerous capital needs that might make it an unappealing enterprise.”
He continued, ” “This risk weighting is based on a several assumptions, the most obvious of which is that the price could drop to zero, causing investors to lose their whole investment. Clients are not protected from transaction, settlement, or FX (foreign exchange) volatility by capital requirements.”
Under global authorities’ efforts to ward off concerns to financial stability posed by the volatile market, banks will be subjected to the strictest capital requirements for holdings in Bitcoin and other digital assets. The banking industry faces greater risks from crypto assets, according to the Basel Committee, because to the possibility for money laundering, reputational issues, and price volatility that could lead to defaults.
Based on an 8% minimum capital requirement, the idea of a 1,250 percent risk weight indicates that, in effect, a bank may need to keep a $1 in capital for each dollar worth of Bitcoin. Securitized products, where banks have limited knowledge about underlying holdings, are another asset with this highest-possible risk ranking.
The Basel Committee, which comprises the Federal Reserve and the European Central Bank, stated in the study that “the expansion of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks.” “The capital will be sufficient to absorb a full write-off of the crypto asset exposures without causing a loss to the banks’ depositors and other senior creditors.”
Before going into force, the proposal will be accessible to public discussion, and the committee has stated that these initial policies are likely to change multiple times as the market evolves. Although no time frame was given in the study, the process of agreeing on and implementing Basel norms around the world can take years.
Some assets, like as tokens with real-world asset values and stablecoins, are designed with minimal capital requirements in mind. This year, cryptocurrency has risen in popularity, with day traders and experts alike looking for riches in Bitcoin and other more esoteric markets. The bull market has been fueled by enthusiasm over institutional adoption, the belief that it is a store of wealth equivalent to “digital gold,” and endorsements from big-name investors like Paul Tudor Jones and Stan Druckenmiller.
Bitcoin has risen from around $10,000 in September last year to as high as $63,000 in mid-April. However, prices have plummeted in the last month, plummeting to US$37,000, owing to increased regulatory scrutiny in China and billionaire Elon Musk’s criticism of Bitcoin’s high energy costs.
“The one consistency has been the volatility – enormous rises, lot of euphoria, followed by massive sell-offs,” said Robert W. Baird & Co’s investment strategy analyst Ross Mayfield of Bitcoin’s movements. “If you believe in it, you’ll probably be able to handle the volatility, but if you’re just in it to make a quick buck, that volatility will be difficult to cope with.” While many banks have been hesitant to enter the crypto trading market, the spike in consumer interest is propelling financial firms such as Interactive Brokers Group and Robinhood Markets to do so.