Bank regulators plot toughest capital rule for bitcoin

Banks must set aside enough capital to cover losses on any bitcoin holdings in full, global regulators proposed yesterday.

Banks must set aside enough capital to cover losses on any bitcoin holdings in full, global regulators proposed yesterday, in a "conservative" step that could prevent widescale use of the cryptocurrency by big lenders.

The Swiss-based Basel Committee on Banking Supervision, made up of regulators from the world's leading financial centers, proposed a twin approach to capital requirements for cryptoassets held by banks in its first bespoke rule for the nascent sector.

El Salvador has become the world's first country to adopt bitcoin as legal tender even though central banks globally have repeatedly warned that investors in the cryptocurrency must be ready to lose all their money.

Major economies, including China and the United States, have signalled in recent weeks a tougher approach, while developing plans to create their own central bank digital currencies.

The Basel committee said in a consultation paper that while bank exposures to cryptoassets are limited, their continued growth could increase risks to global financial stability from fraud, cyber attacks, money laundering and terrorist finance if capital requirements are not introduced.

Bitcoin and other cryptocurrencies are currently worth around US$1.6 trillion globally, which is still tiny compared with bank holdings of loans, derivatives and other major assets.

Basel's rules require banks to assign "risk weightings" to different types of assets on their books, with these totted up to determine overall capital requirements.

For cryptoassets, Basel is proposing two broad groups.

The first includes certain tokenized traditional assets and stablecoins which would come under existing rules and treated in the same way as bonds, loans, deposits, equities or commodities.

This means the weighting could range between 0 percent for a tokenized sovereign bond to 1,250 percent or full value of asset covered by capital.

The value of stablecoins and other group 1 crypto-assets are tied to a traditional asset, such as the dollar in the case of Facebook's proposed Diem stablecoin.

The second group includes cryptocurrencies like bitcoin that would be subject to a new "conservative prudential treatment" with a risk-weighting of 1,250 percent because of their "unique risks."

Bitcoin and other cryptocurrencies are not linked to any underlying asset.

Special Reports