The Basel Committee on Banking Supervision has released guidelines detailing huge capital requirements for banks looking to explore the crypto space.
Regulators have cautioned banks contemplating diversifying into the volatile world of crypto assets. This year has seen a growth in interest of financial institutions looking to broaden their offer. The Basel Committee on Banking Supervision cautioned the lenders to exercise care in investing in digital currencies.
The committee further announced its intention to make banks interested in holding crypto assets hold equivalent capital in reserve. The committee’s suggestion that a 1,250% risk weight be applied to bank’s exposure to cryptocurrencies means that banks may need to reserve a dollar in capital for each dollar worth of Bitcoin. Stable coins and tokens have much lesser capital requirements.
With such reserve capital, banks will be able to shore up any losses because of crypto investment without exposing their investors and depositors to the loss.
The committee, which comprises the European Central Bank and Federal Reserve, believes that the gradual diversification of banks in crypto assets can cause financial instability. This may result from market volatility, money laundering activities and challenges with reputation.
Banks, Crypto Plans and Regulators: The Intersection
The increasing interest in cryptocurrencies may be the singular factor making banks expand into the cryptocurrency market. While some are delving into the world of crypto in greater measures to meet the demands of their clients, others are merely hunting for profits.
Interactive Brokers Group Inc and Robinhood Markets Inc announced their intention to delve into the market last month. Standard Chartered Plc also announced its intention to set up a joint venture for trading Bitcoin.
Investment banks like JPMorgan Chase, Bank of America and Goldman Sachs currently offer crypto futures trading and are contemplating more services while Morgan Stanley is already involved in crypto futures trading and crypto assets for wealthy clients.
The regulations, when implemented – although this may take years – would help to manage the interests of financial investors and depositors and minimize potentially huge losses.
While the banks may be slow to jump in on cryptocurrencies, they have been much faster in adopting the blockchain technology on which the digital assets run.
JPM currently trades over $1 billion JPM coins, its version of Ethereum (which are swapped with digital US treasury bonds) to repurchase agreements as part of smart contracts.
Again, banks have not been able to agree on the best way to offer crypto services. According to Jamie Dimon of JPMorgan, “The idea is to set up the opportunity for crypto trading in a way that is safe and proper.” With the regulation, the safety of the client’s resources and investment is better guaranteed.