Basel draft rules make crypto too costly for banks to trade, says industry

Proposed rules would make “bank involvement in the cryptoasset market cost-prohibitive from a capital perspective,” industry associations have told regulators.

Nine banking industry associations have submitted a letter to the Basel Committee on Banking Supervision (BCBS) in response to its proposal to introduce stringent capital requirements for banks looking to hold crypto assets on their books.

In June of this year, the BCBS had published a consultation paper which assigned a 1,250% risk weight to Bitcoin (BTC), meaning that banks would need to hold $1 in capital for each $1 worth of exposure they have to Bitcoin.

In their letter this week, industry groups — among them, the derivatives associations ISDA and FIA, the Institute of International Finance, European markets body AFME and the Chamber of Digital Commerce — argued that the prudential framework envisaged by the BCBS would create “material impediments to regulated bank participation in cryptoasset markets.” 

They argued that “certain elements of the proposal make bank involvement in the cryptoasset market cost-prohibitive from a capital perspective,” adding: “This approach is especially concerning given the rapid growth of cryptoasset-related market activity with participants that fall outside the perimeter of prudential and market regulations.”

To improve upon the BCBS’ proposal, the associates have argued for a more nuanced taxonomy of various crypto assets and their varying risk profiles. Instead of a crude “application of a single, undifferentiated 1250% risk weight,” the letter includes a detailed appendix that makes the case for taking into account aspects like the existence of a liquid, two-way market for some crypto assets.

Despite their numerous disagreements with the letter of the BCBS’ proposals, the associations nonetheless underscored the need for regulatory certainty “in the near to medium term, particularly given the pace of evolution and client demand for cryptoassets.” The letter also noted that at present, banks’ exposure to crypto remains limited but emphasized that the industry views this limited exposure as being “neither desirable nor sustainable” for several reasons.

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These reasons include the potential benefits that distributed ledger technology holds for the financial services sector and existing, significant demand for crypto-related products and services from customers. Moreover, the letter argued that the benefits of crypto assets and their underlying technology:

“Will be realized most widely and transparently when regulated banks […] are able to play a meaningful role. In particular, the public and the regulatory community would benefit from bank involvement in the cryptoasset space because of this long history of identifying, monitoring and managing risks from both a prudential and conduct perspective on an ongoing basis.”

The letter has proposed that the BCBS should be able to make more use of the existing international prudential framework, e.g. Basel III, to achieve its goals and to implement a framework that is product agnostic.