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Proposed Basel regulations reflects high risk cryptos pose for banks

The Editor
The Editor6/21/2021 04:46 PM GMT+08  • 3 min read
Proposed Basel regulations reflects high risk cryptos pose for banks
Punitive risk-weights for cryptocurrencies such as bitcoin and ethereum may deter banks from holding them as assets
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The Basel Committee on Banking Supervision which is a regulatory body that recommends how much capital a bank needs to hold, is proposing that crypto currencies such as bitcoin, ethereum and the like carry risk weights of 1,250%. This is because these crypto currencies are not backed by assets such as a corporate bond, property or other assets. As such, it would be almost punitive for banks to hold these cryptocurrencies as assets.

However, tokenised traditional assets would be eligible for the same capital requirements as the underlying assets if they confer similar legal rights, according to BCBS. The prudential treatment of fully reserved crypto assets with stabilisation mechanisms such as stablecoin would aim to capture the risks of the underlying assets and of the unsecured commitment of the entity that exchanges the crypto asset for its underlying assets or cash, Fitch Ratings indicates, based on the latest proposals by BCBS. An add-on operational risk charge could apply for these types of crypto assets. (Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference such as the US dollar or gold.)

The BCBS's proposals explicitly exclude treatment of central bank digital currencies (CBDC), which, if introduced, would likely have similar risk profiles to central bank cash, Fitch says.

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