‘Prohibitive’ Global Crypto Capital Norms Could ‘Derail’ Market, TradFi Groups Say

Banks want to see caps on bitcoin holdings increased fivefold under planned global standards

AccessTimeIconOct 4, 2022 at 12:00 p.m. UTC
Updated Oct 4, 2022 at 2:19 p.m. UTC

Jack Schickler is a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He doesn’t own any crypto.

“Prohibitive” caps on crypto holdings could derail innovations using distributed ledger technology, a coalition of eight traditional finance (TradFi) lobby groups told international standard-setters in a document published Tuesday.

The Basel Committee on Banking Supervision – a grouping of international regulators responsible for ensuring banks issue enough capital to cover financial risks – is developing rules that could prove crucial to the adoption of crypto by the TradFi sector.

In June, the Committee proposed that a lender’s exposure to unbacked currencies like bitcoin and ether should never be allowed to exceed 1% of core capital.

That hard cap is “prohibitive and should be recalibrated,” TradFi representatives, including the Global Financial Markets Association and Institute for International Finance, said in response to the consultation, which closed on Friday.

If the issue isn’t addressed, “it may not be economically viable and rational to make the investments necessary to facilitate clients’ needs on crypto asset-related activities, which likely would result in a shift of activity in this space to the nonbank sector,” which is less regulated, the document said.

The lobby groups, which also include the Futures Industry Association, the International Swaps and Derivatives Association, the International Securities Lending Association, the Bank Policy Institute, the International Capital Markets Association, and the Financial Services Forum, want to see the cap raised from 1% to 5% of a bank’s Tier 1 capital – the core financial instruments issued by the bank – and for supervisors to look at net positions rather than gross.

The Basel Committee proposed simply adding together all individual crypto exposures to calculate if the cap is breached. But the industry argues that positions which are long and short can actually balance each other out, insulating a lender from price volatility.

For crypto assets regarded as more stable – such as tokenized securities and stablecoins backed by fiat currency – the Committee said it wanted an extra capital charge to reflect the “various unforeseen risks” of infrastructure based on distributed ledger technology (DLT).

But, the lobbyists’ document said the extra 2.5% capital charge for infrastructure risk “could derail the market” and “would make the decision to engage in DLT infrastructure unattractive.”

Jurisdictions such as the European Union have already legislated to allow trials of securities trading using the blockchain – an experiment which is due to begin early next year.

The Basel Committee’s proposals follow an earlier consultation from June 2021, which met with a volley of criticism for discouraging crypto use by treating it as the riskiest possible kind of asset. The second proposal added the new 1% cap, but also offered a more relaxed treatment when financial instruments are used to cut risk, a practice known as hedging.

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Jack Schickler is a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He doesn’t own any crypto.

CoinDesk - Unknown

Jack Schickler is a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He doesn’t own any crypto.