Industry Association: Basel Bitcoin Risk Weights Proposal Makes Trading Crypto Too Costly for Banks

Nine banking associations have written to the Basel Committee on Banking Supervision (BCBS) in response to its proposal to introduce strict capital requirements for banks wishing to hold crypto assets on their books.

In June, the BCBS published a consultation paper proposing a risk weight of 1,250% for Bitcoin (BTC), meaning that banks would need to hold $1 for every $1 of exposure to Bitcoin Capital.

In letters this week, industry groups – which include derivatives associations ISDA and FIA, the Institute of International Finance, the Association for Financial Markets in Europe (AFME) and the Association for Digital Commerce – argued that the prudential framework envisaged by the BCBS would be “imposed on regulated banks”. create substantial barriers to participation in the cryptoasset market”.

They argue that “certain elements of the proposal make it prohibitive for banks to participate in the crypto-asset market from a capital perspective,” adding that “given the rapid growth of crypto-asset-related market activity, participants do not belong This approach is of particular concern in the context of prudential regulation and market surveillance."

To improve on the BCBS proposal, the associations advocate for a more granular classification of various cryptoassets and their different risk profiles. The letter includes a detailed appendix setting out the rationale for considering, among other things, two-way liquidity markets for some cryptoassets.

Although the associations have had many different opinions on the BCBS proposal, they still emphasized that regulatory certainty is necessary "in the near and medium term, especially considering the speed of development of crypto assets and customer needs." The letter also notes that banks’ exposure to cryptocurrencies remains limited at this time, but stresses that the industry considers such limited exposure “neither desirable nor sustainable” for several reasons.

These reasons include the potential benefits of distributed ledger technology for the financial services sector, as well as the huge existing demand from customers for crypto-related products and services. Additionally, the letter states:

“The benefits of cryptoassets and their underlying technology will be realized in the broadest and most transparent manner when regulated banks… can play a meaningful role. In particular, the public and regulators will benefit from banks’ participation in the cryptoasset space , as banks have a long history of consistently identifying, monitoring and managing risk from both a prudential and behavioral perspective.”

The letter proposes that the BCBS should be able to make greater use of existing international prudential frameworks, such as Basel III, to achieve its objectives and implement a product-agnostic framework.

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