New bank rules restrain and recognise crypto

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It is a rare event that unites bitcoin believers and crypto critics. But both largely welcomed the news from the global rulemaker for big banks that it plans to apply the most punitive capital rules to lenders that hold crypto assets. It is plainly right to do so. Its action must be matched by co-ordinated policy around the world to make safer an asset whose popularity seems destined to keep growing, despite the risks that crypto finances organised crime and terrorism. Crypto’s volatility imperils increasing numbers of retail investors, not to mention posing credit risks for lenders.

The value of bitcoin, which accounts for roughly half the $2tn crypto market, rose by as much as $2,000 on Thursday’s announcement by the Basel Committee on Banking Supervision, fuelled by the notion that regulation, rather than an outright ban, was official recognition of an asset class that has now come of age. Either way, a $5,000 rise since Tuesday, spurred also by El Salvador becoming the first country to adopt bitcoin as legal tender, highlighted the committee’s point about volatility. Bitcoin has ricocheted from under $30,000 to over $60,000 this year, before crashing back to about $37,000.

Rather than regulating crypto assets themselves — which is not in the Basel Committee’s gift — the banking supervisors sought instead to tighten rules for regulated lenders increasingly dipping their toes into crypto’s murky waters. For now, that means offering research or facilitating client trading rather than banks’ own proprietary trading of crypto. The proposed rules essentially act as a disincentive to prop trading or buying crypto for clients, which would bring the assets on to banks’ balance sheets.

The committee proposed banks would have to hold the same amount of capital as the exposure they face in crypto, so a $100 exposure would result in a $100 capital requirement. This is a manifestation of a longstanding warning by regulators that investors — and now banks — should only hold crypto if they can afford to write off their entire investment. The rules rightly make banks’ shareholders rather than depositors shoulder the risk.

Central bank digital currencies, a burgeoning area of interest, will not be captured by the new requirements. Stablecoins, pegged to a fiat currency, would be given more lenient treatment, with one important caveat: banks must guarantee that the coins are fully reserved at all times. This is no mean feat when one considers that tether, one of the most well known stablecoins, was accused by the New York attorney-general earlier this year of lying that it was always fully backed by the US dollar (it agreed to pay a penalty without admitting wrongdoing). More likely, such checks will not be worth the candle for banks — which is the point.

There is an irony to crypto being recognised as part of the established financial system when it was created as an anti-establishment snub. There are elements of traditional finance that can be improved, and certain crypto assets may help. Easing cross-border settlement and payments is one such area. Not entirely coincidentally, a second and welcome announcement from Basel revealed that together with the national banks of France and Switzerland, it will work on a wholesale settlement system using CBDCs.

The Basel committee has limited power. It has done what it can in the face of inaction by governments and differing views on the crypto market, even within the same regulatory bodies. It is now time for more coherent policy: whether hazard or haven, crypto is here to stay.

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