Conventional banks should have a cap on their holdings of unbacked crypto assets to safeguard financial stability, the Basel Committee on Banking Supervision said Thursday.
The international standard-setter is having another go at setting out how much capital lenders need to hold for their crypto exposures, after a first consultation published last year met with an outcry from the industry for being too conservative.
International rules, toughened after the 2008 financial crisis, require lenders to have capital reserves that can be used as backup in case assets such as loans turn sour. It also stops banks from having significant exposure to any one entity since the bank’s fortunes could then hinge on the collapse of one corporation.
Those requirements should also apply to crypto, the Committee says.
“The large exposure rules of the Basel Framework are not designed to capture large exposures to an asset type, but to individual counterparties or groups of connected counterparties,” the consultation said. “This would imply, for example, no large exposure limits on cryptoasset where there is no counterparty, such as bitcoin.”
But the Committee seems to have softened its position on crypto holdings where the bank is able to insure against its risk after a receiving a barrage of complaints that its previous approach was too cautious. The original plans meant a bank with an exposure to crypto of $100 has a minimum capital requirement of $100, essentially ruling them out from any incentive to get involved in crypto markets.
Under the new plan, lighter rules would apply to cryptos that have an equivalent liquid derivative such as an exchange-traded fund, given the possibility to “hedge” exposures.
But for the riskiest class of crypto assets, which includes those that aren’t backed by conventional reserves or asset-pegged stablecoins that aren’t satisfactorily stabilized, there would be an exposure limit set at 1% of Tier 1 capital, or the core capital held in a bank’s reserve, the document said.
The proposal implies the 1% cap would apply to unbacked cryptocurrencies like bitcoin, and for cryptocurrencies like algorithmic stablecoins which are backed by other cryptocurrencies and stabilized by an algorithm. In May, an $18 billion algorithmic stablecoin terraUSD collapsed, prompting regulators to fast-track oversight.
The cap also applies to total holdings of crypto assets classified as high-risk. For instance, if a lender has 0.6% in algorithmic stablecoins and 0.5% in bitcoin, it has breached the 1% limit.
The Committee is seeking comments on the plans by the end of September, and says it will monitor the fast-moving and volatile market in the meantime.
Read more: Basel Committee to Review Proposed Capital Requirements for Banks With Crypto Assets