The Basel Committee said Thursday that the banking industry faces increased risks from crypto assets due to potential money laundering, reputation challenges, and extreme price volatility that could lead to defaults.
The Banking Supervisory Commission has proposed a 1250% weighting of banks’ exposure to Bitcoin and some other cryptocurrencies. In practice, this means that banks may need to hold one dollar of capital for every dollar worth of cryptocurrency, based on a minimum capital requirement set at 8%. Other assets that carry the highest possible risk weight include securitized products for which banks do not have sufficient information about significant exposures.
The Basel Committee, which includes the Federal Reserve and the European Central Bank, said in the report: “The growth of crypto-assets and related services has the potential to raise concerns about financial stability and increase risks for banks.” It added, “The capital would be sufficient to absorb the full write-down of exposure to crypto assets without exposing depositors and other major bank creditors to a loss.”
The proposal is open for public comment before it enters into force. The committee said these initial policies are likely to change several times as the market develops. The capital requirement will be lower for some other assets, such as tokens with values associated with real-world assets.
The popularity of the cryptocurrency has exploded this year, with traders and day-to-day professionals alike looking for profits from Bitcoin, as well as the more uncertain areas of the market. There were several factors that fueled the cryptocurrency bull market, such as enthusiasm about institutional adoption, the idea that it is a store of value akin to “digital gold,” and endorsement from well-known investors such as Paul Tudor Jones and Stan Druckenmiller.
Bitcoin jumped from about $10,000 last September to $63,000 in mid-April. However, prices collapsed last month as they fell back to around $37,000, on the back of tougher regulatory scrutiny in China and Elon Musk’s criticism of the cryptocurrency’s high energy cost.