September 28, 2023

Tricia Oak

Business & Finance Excellency

Finance industry warns against ‘unnecessarily restrictive’ crypto capital rules

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The global financial industry has urged regulators to refrain from imposing stringent capital rules on digital assets, warning these requirements would drive activity underground and deprive banks of the benefits of the technology.

Trade groups representing banks, asset managers and the blockchain industry told the Basel Committee on Banking Supervision that the authorities’ proposals would make it too expensive for banks to participate in the rapidly growing crypto industry and related technologies.

In a letter sent on Monday and seen by the Financial Times, the groups said the proposals to cover the $2tn crypto industry were “so overly conservative and simplistic that they, in effect, would preclude bank involvement in cryptoasset markets”.

The response comes as banks try to balance their customers’ growing interest in trading and holding cryptoassets with regulators’ clampdown on the digital asset sector.

The Basel committee, the world’s most powerful banking standards-setter, proposed in June that cryptocurrencies should incur the toughest possible capital requirements, something that would make it expensive for banks to deal in digital assets.

Global regulators have stepped up their scrutiny over the fast-moving digital asset sector this year as investor interest has soared, and some argue that acceptance by traditional financial institutions will help to curb the crypto sector’s excesses such as extreme market volatility and consumer risks.

The letter was signed by trade groups including the Global Financial Markets Association, the Institute of International Finance, the International Swaps and Derivatives Association, the Financial Services Forum and the Chamber of Digital Commerce, which represents the blockchain industry.

“Today, a lot of activity is outside the regulated sector. We think everyone will be better off if regulated banks can meaningfully participate in these markets and provide access for their customers,” said Allison Parent, executive director of the GFMA, which represents banks globally.

The Basel committee proposed two categories of capital requirement for banks holding cryptocurrency. Digital assets that looked more like conventional securities, including stock tokens and fully reserved stablecoins, could qualify for a modified version of existing rules on minimum capital standards for banks. 

The rest, including bitcoin and ethereum, would fall under a “conservative” prudential regime that would effectively require banks to hold at least $1 of collateral against each $1 of cryptocurrency.

The groups said the distinction did not recognise the diverse range of cryptoassets and should tie the capital treatment of crypto assets to their risk; the rules should also make a distinction between the risks banks took in holding the assets and trading them, they suggested.

Basel has also suggested stablecoins — cryptocurrencies pegged to traditional assets such as currencies — would also qualify for existing rules if they were fully backed by reserves at all times. The groups described Basel’s approach as “unnecessarily restrictive” and suggested the underlying asset be allowed greater leeway to move in value before capital rules kicked in.

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The industry groups urged the regulator to move quickly, saying there was a “certain measure of urgency in ensuring that supervised banks can participate” given the rapid developments in crypto markets outside the scope of current regulation. 

State Street and Citigroup are among the banks that have indicated they are aiming to provide more crypto services to customers, while some of Wall Street’s biggest trading companies have recently stepped up their push into crypto markets.